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Pension Rollover

As American life expectancies increased, companies realized they would be responsible for retiree payments for longer periods of time.  Theoretically, someone who started working at 25 and worked for 25 years could be eligible for retirement at age 50 under certain pension provisions.  If that person retired at 50, but lived to age 80 or beyond, a company could be responsible for pension payments for a longer period of time than a person was employed.


To reduce the risk or financial exposure of longer life expectancies, companies may offer a pension payout or pension rollover in the form of a one-time, lump-sum payment.  With this payment method, companies make a one-time distribution to a former employee thereby shifting the longevity risk and responsibility of these retirement funds lasting a lifetime to the former employee.  Pension payouts or pension rollover funds can be rolled over or transferred to an Individual Retirement Account or IRA.  A pension rollover allows for the continued tax-deferral of a pension account and does not trigger a tax bill.


If one decides to receive a pension payout as a lump sum, the employer is required to withhold 20% of the total pension payout amount.  There is no 20% tax rate; the marginal tax rates are 10%, 12%, 22%, 24%, 32%, 35% or 37%.  If you’re in the 24% tax rate or higher, consider the mandatory 20% withholding as a down payment on your taxes and you could potentially owe more.  If you’re younger than 59½ when the lump sum payment is made, you may be subject to an additional 10% early withdrawal penalty.  The mandatory 20% withholding is not applicable when a pension rollover is direct to an IRA.


Taking a pension payout as a lump sum payment could also result in a person being in a higher tax bracket because the total amount of the distribution is added to all other income.  A person that would normally be in the 24% tax bracket, depending upon the amount of the lump sum payment, could have total income that places them in the highest tax bracket at 37%.  Adding that to the 10% early withdrawal penalty, it is possible that nearly 50% would be owned in taxes and penalty.


Pension assets enjoy the benefits of continued tax-deferral and may even have the potential for future growth which could result in greater income in retirement.  A pension rollover to an IRA can be invested in a variety of investment options including certificates of deposits (CDs), stocks, bonds, mutual funds, and other investments once a pension rollover has been executed.

If you have additional questions about what to do with a 401k after retirement, how to roll over 401k to IRA, or moving a 401k into an IRA contact the Jones Wealth Management Group at 901-312-9166 or complete our contact form (click here) to schedule a no-cost consultation to discuss which option best suits your individual situation or to receive information about current rates.

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