Traditional retirement days are coming to an end because companies are still turning to 401 (k) s for occupational retirement plans. Some members of today’s workforce, mainly generation X and older, were lucky to be enrolled in blue-chip retirement plans before they were offered. However, new access to pensions fell sharply to 4% of the workforce. Can you rollover a pension lump sum into an IRA?
Transferring a company pension plan to an IRA is a simple procedure with basic principles. First, you must be separated from the service to be eligible for renewal or the company must offer a closure plan. Secondly, if funds are withdrawn from the company’s plan, they must be deposited back into an eligible IRA or other retirement plan within 60 days of payment or subject to tax. You must first check with your new employer to see if you can allow transfers from other plans. Not all of them allow raids. The HR director at your new employer can provide the information you need to complete your rolling documentation.
How to transfer a retirement plan: direct method
Transforming a pension into an IRA is an extremely simple procedure if you use the direct method. The first step is to set up your IRA if you don’t already have one. Then you need to talk to the employer and ask for the documents needed to initiate the payment from the retirement plan. The most important thing is to ask for a “direct” transition to your IRA supervisor. This will trigger a direct money transfer from one account to another. The retirement plan administrator and IRA guardian will arrange backstage transfers – your only job is to fill out the documentation.
Usually, submitting an application for a pension would result in a tax liability in the year in which you accept the payment. It would also result in a 10% penalty for earlier payment if you are under 55 years old. Reversing your account balance eliminates this tax liability. Rollover is tax neutral, with no taxes or penalties to pay. The transfer will be taxed later when you start receiving payments, probably after you retire.
How to transfer your retirement plan: indirect method
You also have the option of paying the account balance directly to you, so you basically borrow pension funds for a short period. The rule is that you have to re-deposit the money to the IRA within 60 days, otherwise the distribution will be subject to tax and possibly penalties if you are under 55 years old.
With indirect rolling, the plan administrator must keep 20 percent of the account balance before writing the check and send the money to the tax office. But the IRS rules say that you must deposit 100 percent of your retirement payment to the IRA to avoid paying taxes. You will need to find the amount of tax deduction from another source, such as your savings, to complete the rollover completely.
Understand that you can only make one 60-day rollover in any 12 month period without tax consequences. If you transfer multiple employer plans from many different employers, you are limited to one per year.
With little planning, rollover can provide you and your heirs or beneficiaries with a number of benefits compared to leaving money in deposit in your company retirement plan. By following the rules, you can enjoy the benefits and avoid tax pitfalls.