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Understanding Pension Rollovers

April 26, 2024

Pension plans have long served as a cornerstone of retirement savings, offering financial security and stability for millions of workers. In this section, we discuss the ins and outs of pension rollovers.

Can Pension Plans Be Rolled Over?

Pension rollovers involve transferring funds from a traditional pension plan into an individual retirement account (IRA) or another qualified retirement plan. While not all pension plans offer rollover options, many do provide this flexibility, allowing participants to take charge of their retirement savings and investment decisions. 

When Would Someone Need to Roll Their Pension Over?

Job Change or Retirement 

When transitioning to a new job or retiring, individuals may choose to roll over their pension funds to consolidate retirement accounts and streamline financial management.

Desire for Investment Control

Pension rollovers empower individuals to exert greater control over their investment choices, enabling them to tailor their portfolios to align with their risk tolerance, financial goals, and investment preferences.

Access to More Investment Options 

Pension plans often impose limitations on investment options, whereas IRAs offer a broader range of investment choices, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

Rules and Tax Implications for Rolling a Pension Over

Direct Rollover vs Indirect Rollover

A direct rollover involves transferring funds directly from the pension plan to the IRA or qualified retirement account, while an indirect rollover requires the participant to receive the distribution and then deposit it into the new account within 60 days to avoid tax penalties.

Tax Deferral 

Direct rollovers allow participants to defer taxes on the transferred funds until withdrawal, whereas indirect rollovers may trigger immediate tax withholding and potential penalties if not completed within the specified timeframe. 

Important Things to Consider 

When contemplating a pension rollover, individuals should consider the following factors:

Fees and Expenses

Evaluate the fees and expenses associated with both the pension plans and the receiving retirement account to ensure cost-effectiveness and maximize investment returns. 

Investment Strategy

Develop a comprehensive investment strategy tailored to your retirement goals, risk tolerance, and time horizon. Consider consulting with a financial advisor to devise a customized investment plan.

Conclusion 

Pension rollovers offer individuals the opportunity to take control of their retirement savings, access a broader range of investment options, and optimize their financial future. By understanding the rules, tax implications, and important considerations associated with pension rollovers, individuals can make informed decisions to enhance their retirement preparedness and achieve long-term financial security.

If you are considering rolling over money from an employer-sponsored plan, such as a 401(k) or 403(b), you may have the option of leaving the money in the current employer-sponsored plan or moving it into a new employer-sponsored plan. Benefits of leaving money in an employer-sponsored plan may include access to lower-cost institutional class shares; access to investment planning tools and other educational materials; the potential for penalty-free withdrawals starting at age 55; broader protection from creditors and legal judgments; and the ability to postpone required minimum distributions beyond age 73, under certain circumstances. If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. You should also understand that Commonwealth and your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and that there may be account transfer, opening, and/or closing fees associated with a rollover. This list of considerations is not exhaustive. Your decision whether or not to roll over your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.

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