Should You Rollover Your Pension into an IRA?

Joseph Meyer
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Financial Strength of Your Company

First off, in case your current employer offers a pension, you should know that the financial strength of the company itself is heavily dependent on the pension plan. The risk to pensioners is typically not in the assets contained in their individual pension accounts, but in the assets that they’re backed by. So, when most company pensions were created, the risk of that company going belly up was not considered to be a major risk factor.

The purpose of most pension plans is to ensure future income to a retiree in the event that that company were to shut its doors. But that doesn’t mean that the pension plan would necessarily be guaranteed by that company.

Most government pension benefits are guaranteed for all pensioners. But this risk can still be mitigated by investment of the funds in a diversified portfolio of investment grade assets. The assets in the pension plan dictate the level of benefits. If the assets in the plan are a diverse portfolio, the risk is minimized.

However, most defined benefit pension plans today offer less-than-optimally diversified portfolios. The most common example of a less-than-optimal portfolio is to hold company stock in the plan. This exposes the pension fund to a significant risk.

2. How is Your Health?

THERE IS a reason why employers who sponsor a 401(k) plan elect option 2, and they do this to make sure you are fully vested. In addition to enjoying the valuable tax benefits in plan 1, there is another reason to max out a 401(k) plan—if you are healthy and in good shape, you have no reason to use up your plan assets by ceasing to work at age 60 or having a stroke at age 65. To put it another way, if everything is in working order, it makes perfect sense to avoid tapping into your hard-earned retirement assets.

There are many ways that you can optimize your benefits in a 401(k) plan. Simply put, a tax-deductible retirement plan is the best way you can invest. The following is an all-encompassing list that will help you to maximize your retirement funds in these tax-advantaged accounts.

Beneficiary Minded

When you decide to rollover your pension funds to an IRA, you have to designate a beneficiary. This beneficiary will inherit your IRA in the event of your death, giving him or her complete control over the account. What’s more, in an IRA, there’s no limit on the number of beneficiaries you can choose, nor are they required to be children or family members. You can designate someone who is like a family member, such as a really good friend or even a pet!

So let’s say that you’ve rolled over your pension to IRA. You’re able to name a beneficiary (your friend), and you also decide to name yourself as the contingent beneficiary. In case your friend passes before you do, you will automatically inherit his or her IRA account.

But what happens if your friend passes away, and you’re still alive? Are you still the beneficiary of the account? The short answer is yes. Because you’re the contingent beneficiary of the account, you now have to design an estate plan for the account.

That said, IRA beneficiaries have more options for the account than a decedent’s beneficiary, which makes the process a lot easier.

Lump Sum Pension Payment Vs. Monthly Benefit

When it’s time to start taking distributable benefits with a qualified retirement plan, the easiest option may not be the right option.

When you start taking your pension through retirement plan payments, you have two options:

  • Proceed with a monthly pension
  • Opt for a lump sum distribution of the benefits

Most business owners rollover their pensions into a self-directed IRA, taking the lump-sum distribution of the benefits and investing the money in both the plan contract and IRAs that they set up for their outgoing financial security. While it’s easier to take a lump sum distribution of the pension, it’s not necessarily the best option for you if you’re looking to create a firm financial future for yourself.

This is because taking the monthly benefit will provide the most steady income over a longer period of time. However, taking the lump sum distribution of the pension may be the better way to go if you already have a large retirement nest egg growing from other pension plans and IRA accounts and you’re not as worried about the immediate income.

If this sounds like you, take a look at the calculator requirements, software requirements, and pricing information to see whether Self-Directed IRA Inc. is right for you.

Before 59 1/2- In Service Distribution

If you’re nearing retirement age, there’s a good chance that you’ll be working toward a pension, either one that you’ll receive based on your years of work (if you’re a government employee or union member) or one that’s sponsored by your company (if you’re a non-government/union employee). The former provides a nice solid source of passive income that’s generally close at hand and easy to get at. The latter often takes years to reach the payout level and is subject to all the uncertainty of your employer’s continued existence and its financial state.

About the Author

Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.”

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