What Is a Pension Rollover?
Pension rollovers have gotten complicated with all the different rules and options out there. As someone who spent years helping family members navigate their pension decisions, I learned everything there is to know about these transfers. Today, I will share it all with you.
A pension rollover basically moves money from a traditional defined benefit pension into an IRA or another qualified retirement plan. This option usually pops up when you leave your employer, retire, or your company decides to kill off its pension plan entirely.
When Rolling Over Actually Makes Sense
I’ve watched people agonize over this decision, and honestly, it comes down to a few key scenarios:
Your pension plan got frozen or terminated. Companies are doing this constantly now, offering lump sums to get future obligations off their books. My uncle got one of these offers in 2019, and the decision kept him up at night for weeks.
You want to call the shots with your money. An IRA gives you thousands of investment options. The pension? One monthly payment amount, take it or leave it. That’s what makes the rollover endearing to us control freaks – the ability to adjust, rebalance, and react to changing circumstances.
You’re thinking about your kids and grandkids. IRA balances can pass to heirs. Pension payments usually stop when you die (or when your spouse dies, if you elected survivor benefits). If leaving money to the next generation matters to you, this is worth considering.
You’re not confident about living to 95. I know that sounds dark, but it’s practical. Pensions pay out based on life expectancy math. If your health history suggests a shorter timeline, the lump sum might actually deliver more total value.
When Keeping the Pension Is the Smarter Play
That said, I’m apparently one of those people who sees both sides of everything, and sometimes keeping the pension wins.
Monthly payments work better when you expect to live longer than average. The pension provides what actuaries call “longevity insurance” – you can’t outlive it. My grandmother lived to 98 and collected her pension for 33 years. Try beating that with a lump sum investment strategy.
If managing investments sounds stressful or boring, the pension handles everything. No rebalancing, no watching the market tank 20% and wondering if you should sell. Just a check every month.
Some pensions include health benefits that disappear if you roll over. Check this carefully before making any decisions.
And if your pension is backed by a rock-solid government entity or a blue-chip company, the security might be worth more than the potential upside of investing it yourself.
How to Actually Do the Rollover
Alright, here’s the practical part. Probably should have led with this section, honestly.
- Get the distribution packet. Call your pension administrator and request it. This usually takes a week or two to arrive.
- Open a rollover IRA. If you don’t have one, set it up now. Pick a custodian with low fees – Fidelity, Schwab, and Vanguard are the usual suspects.
- Request a direct rollover. This is crucial. The check should be made out to your IRA custodian, not to you. “Fidelity FBO [Your Name]” – that kind of thing. This avoids the 20% mandatory withholding that applies if they send the money to you personally.
- Fill out the paperwork. Both the pension plan and your IRA custodian will have forms. The pension form specifies where the money goes. The IRA form receives it.
- Confirm everything arrived. Check your IRA account after a few weeks. Then invest the funds according to whatever retirement strategy you’ve mapped out.
Tax Stuff You Need to Know
Direct rollovers to traditional IRAs don’t trigger any immediate taxes. Your money stays tax-deferred, growing quietly until you start taking withdrawals in retirement.
But here’s the trap that catches people: if you receive the funds personally (indirect rollover), you’ve got exactly 60 days to deposit them into an IRA. They also withhold 20% off the top for taxes. So if your pension pays out $100,000, you get a check for $80,000 – and you somehow need to come up with the missing $20,000 to deposit the full amount and avoid penalties.
Miss that 60-day window? The whole thing becomes taxable income, plus a 10% early withdrawal penalty if you’re under 59.5.
Direct rollover. Every time. No exceptions.
