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Rolling Over Your Pension Plan Into IRAOver 90,000 Ford Employees are facing a major decision: What to do with their pension.

Should they “play it safe” and continue to take the monthly distributions?

Or they take control of the money by rolling their pension into an IRA?

Lately, I’ve had several clients that are faced with the same dilemma.

When you retire and you have a 401k, then the choice is usually pretty simple- roll the 401k over into an IRA.

There are some exceptions to the rule -under age 59 1/2 and if they hold employer stock- but usually that’s the way to go.

What happens if a pension is involved?

Pensions will typically pay you an income for the rest of your life and then pay your spouse half of the amount for the rest of her life.   If you don’t choose the annuity option, then the only other choice is to take the the lump sum option.

The lump sum option will allow you to take a big chunk up front and then roll that over to an IRA.  You then are in control of how much you take per month as your retirement income.

Let’s take a look to see if it makes sense to roll over your pension into an IRA.

Before I continue, I should say that not all pensions are allowed to take the lump sum option.  One quick example that comes to mind (at least in my region) are teachers.  Most teachers only option is to take the monthly annuity benefit.

1. Financial Strength of Your Company

Deciding on whether to choose the lifetime income option vs. the lump sum might be as easy as evaluating the overall financial strength of the company you work for.  As I have mentioned before in a previous post “Company is Going Bankrupt, What About My Pension“, your pension is insured by the PBGC (Pension Benefit Guaranty Corporation) , but it’s only up to $54,000 and that’s only if you retire at 65.  Over and above that, then you are out of luck.  Any pension amount that is over the $54,000 limit will make the decision to take the lump sum more attractive.

2.  How is Your Health?

Does your family have a history of illness?  If so, then taking the lump sum and rolling it to an IRA might be the most viable option.  What’s the point of having a income for the rest of your retirement if you are only in retirement for a few short years?

I have a client whose never married friend had worked for a company for almost 30 years.  When that person retired, they optioned to take the the annuity option and receive monthly payments.  Just after three months of receiving their checks they unexpectedly passed away.

Guess what happened to the remainder of the pension benefit?  It all went back to the company since they didn’t have a spouse to pass it on to.   If they had rolled the pension into an IRA, they could have elected another family member to receive it or at least donated it to a charity or their church.

3. Beneficiary Minded

Most pensions work in that you (the employee) will receive an income stream for the remainder of your life.   When you pass, your surviving spouse will receive half of the amount you received.  (Some pensions do allow for your spouse to receive the full benefit, but typically you would have had to take a lesser amount in the beginning).

If your spouse predeceases you, then there’s no more to be paid.  Same when your spouse passes- the payment stops with him or her.  If you have surviving children, they will not receive a dime from the pension.

By opting to roll over your pension into an IRA, you will at least have the option to pass the remainder (if any) to your heirs.  Also, if done effectively, they might be able to stretch the IRA over their lifetime.

4. Lump Sum Pension Payment Vs. Monthly Benefit

June 16
Creative Commons License photo credit: stacya

The last determinant is just like formerly called Puff Daddy’s song says, “It’s All About the Benjamin’s“.  You need to closely analyze how much the lump sum pension benefit option vs. the monthly benefit.  Let me highlight two situations where it the choice was fairly obvious.

Example 1

I had one client who was offered an early buyout on his pension.   He was almost 55 yet so he could start taking the payments immediately.  The monthly benefit that they were offering was approximately $3000 per month.  He had elected to choose a lower amount (the $3000) so that his spouse would receive the same amount for her lifetime.   That wasn’t a bad option, but just to be sure, let’s look at the lump sum amount.

The pension was an older one that was more beneficial to tenured employees so the lump sum amount was only around $250,000.   I say “only” because assuming no growth on the dollar amount, then the client would have completely exhausted his pension in just under 7 years right before he turned 62.   In this case it was a no brainer to elect the guaranteed monthly benefit.

Example 2

Another client had just turned 62 and her company was offering her a lump sum amount of $600,000.   Not to bad, but let’s look at the monthly benefit.   The monthly benefit amounted to $4,000 per month ($48,000) per year.   Thus far it’s not such a clear cut decision.   What made it crystal clear was that the client has had a 401k with the same employer for just over $200,000 and had a sufficient emergency fund plus minimal debt.  On top of that, they had 3 kids in which they desired to pass an inheritance to.   Believing that they would never outlive their retirement nest egg, it may complete sense to roll over the pension into an IRA.

Before 59 1/2- In Service Distribution

One last point that I should mention is that you don’t have to wait until you officially retire to roll your pension over.   Once you reach the IRS’s magic age of 59 1/2, you can elect to do what’s called an In Service Distribution.  Even if you plan to continue to work, you can elect to roll over your pension amount into an IRA.  Your pension will then to continue to accrue with your employer and you have complete control of your money outside of your employers hands.  This also works with 401k plans as well.

Deciding on the fate of your pension is a very important decision. Review your options more than once and seek council from different parties. I suggest meeting with a Certified Financial Planner and a CPA to help decide which option is best for you.

Looking to rollover your pension into an IRA? Scottrade is a great online option that offers a no fee Roth IRA. Check them out at

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Comments | 41 Responses

  1. Jeff says

    After 33 years of working for a Fortune 500 communications company (no, not Verizon), I’m entitled to a pension of $1,900 per month. People who are receiving pensions of $3,000 per month should consider themselves among the elite. You really should get out in the world a little more before writing these kinds of articles. You are catering to the 1% – there are millions and millions of people who might be fortunate to get a pension of $300 per month.

    • Jeff Rose says

      @ Jeff

      Hmmmm…..I have dozens of existing clients from various industries as well as plenty of communication from all over the country that ask me questions about their pension. Many of them are entitled to benefits as low as $500 to the high end of $3000 +. I’ve even had a few close to $5000 per month who are not employed by a Fortune 500 company.

      Maybe I’m not the one that needs to “get out in the world a little more“, eh?

      • subs says

        Ok- His comment was a little harsh and off base, but I thought your reply was a bit heavy handed. You should be able to take rude noise from the audience without being snobby in reply. Just my two cents. If you write articles for the web, expect people to react positively and negatively.

        • Raj says

          I have to agree with Subs. I am reading to decide on a 16K lump sum or $200 a month in 10 more years. Reading about 4-5K a month just makes me wonder if they worked for the government or something. No private companies have pensions anymore.

        • Steve says

          A little harsh?

          “You really should get out in the world a little more before writing these kinds of articles. You are catering to the 1%”

          He’s basically telling a certified financial planner he doesn’t know what he’s talking about just because his one isolated case is different. I think that’s far more heavy handed than the reply was.

  2. unadog says

    Ford is using a discount rate of 7.5% to determine the lump sum.

    Right now, I could buy an annuity to replace that income stream with a return of 2.2%. So basically I would need 3 times the amount that Ford is offering to ensure the same income in retirement.

    I would be happy to take a realistic lump sum offer based on Treasury rates under the old rules. A 3% to 4% discount rate would be realistic.

    With a 7.5% discount rate, Ford is transferring tremendous market risk to it’s employees and hoping for short term gains for itself. I am completely disgusted with their offer and their mentality.

    At least GM is offering a true annuity to it’s employees. Maybe if Ford gets few or no takers, it will come back to the table with a realsitic offer.

    Even it’s own pension funds are 60% invested in bonds. There is no prayer that you could get a 7.5% return with conservative investments to last your lifetime in retirement.

    • Reply_to_Unadog says

      You have it exactly what my calculations show. Its not just Ford – since the financial crisis, many other employers have changed over to some kind of discount rates for the lump sum calculations.

  3. mike says

    I was just offered a monthly payment of $233 a month from my pension when I turn 65 in 10 years. Should I roll the small pension over into a Traditional IRA now or something else, to try to increase my payouts later ?

    • says

      @ Mike

      Unfortunately, it’s not as easy to answer that.

      What is the lump sum amount they offered?
      What are your monthly expenses now. Do you anticipate them to be the same 10 years now. (Hard to say but one big expense may be your home)
      If you did roll it over, what would you invest it in?
      What’s your risk tolerance?

      There are quite a few things to consider before rolling your pension into an IRA or taking the lifetime payout.

      • mike says

        The lump sum is only $19,300. My step-son is moving out of my house in Feb., so I will be covering the additional $300 a month for my mortgage, which I was receiving from him as rent.
        Plus, I am about to have knee surgery in a month, so I will have more monthly bills from the hospital, doctor, etc.
        I am at least enrolled in my current employer’s 401k plan.
        I’m not sure yet what I would invest the money into, in a Roth IRA. Or should it go into a Traditional IRA ?

  4. kathy says

    i am getting a lump sum of $500,000. I am young. Monthly annuity would be about $1,600 a month. I have no debt and no mortgage and no one to support and i have savings/emergency fund. Not married. I plan on college and another job in future. Do i do a lump sum or take it monthly ? HELP !

      • Kathy says

        I am only 48 !! I am thinking of the lump sum, but it might be gone in my early 70’s , if I take out 2,000 a month to live on !! If I take the monthly life annuity, it might not be enough to live on, but I would get that cash untill I die. So either 3 choices, lump sum, life annuity, or investing in stocks. I am really conservative and not that knowledgeable on stocks/bonds. I will probabaly need a part time job to supplement. Just don’t know what to do with this pension decision. Please help. thank you.

    • says

      @ Kathy I would also suggest meeting with a fee-only financial advisor (preferably one that can’t sell you any products) to review your situation and see if taking the pension or the lump sum makes the most sense.

    • Harold says


      Have you thought about splitting up the distribution? Does your pension offer the potential to specify a certain amount as a lump sum and leave the remainder with the pension? One idea to explore could be taking the lump sum in order to take control of your assets and splitting it up yourself. For example, you could keep half in a traditional IRA purchasing low volatility options or FDIC insured market linked CD’s and put the other half into some type of annuity owned by you that suits your distribution needs. There are some that can provide you with a predictable income schedule at various points in your life, depending upon when you plan on taking withdrawals. This could offer you some guarantee and also some flexibility, all the while knowing your money is in your control. Make sure do do all of your research and factor in what you anticpate your future income needs to be. Many pensions are also a “promise,” not a “guarantee,” so keep that in mind. Great article!

      • KATHY says


  5. B says

    I’m 33. My accrued benefit is 333.83 per month as a single life annuity starting at age 65. The lump sum they’re offering is just $6,559.33. What should I do?
    They also have an option for immediate annuities:
    Single Life 15.92/month for my lifetime and no benefit after death
    50% Joint and Survivor Annuity $15.59/month for my lifetime and $7.80/month to joint annuitant after my death
    75% Joint Survivor Annuity $15.43/month for my lifetime and $11.57/month to my joint annuitant after my death

    • says

      @ B Find a future value calculator online and start with $6,559.33 with a 32 year timeline. Try using interest rates between 4-6% and find what the future value is. That’s a starting point to see how much money you could have 3 decades from now.

  6. Pam says

    I am 52, employed and have a 401k with my employer. My husband is laid off at 53 and we have about 1+ year of wages in available savings. We are paying half of the tuition for two kids in college. My employer has been bought out several times by larger companies but has maintained a pension plan from one of the original owners for those of us that were there when it was active, although the fund has been frozen since 2006 . I just received a letter from the corporate office saying the pension is 80% funded and I can now elect to defer receipt to a later date, take a monthly annuity of $442 or take a lump sum of $66,000. I don’t think I want to leave it with the company as I may be restricted from it again in the future and would rather have control over it. Not connected but possibly a factor is that my husband has a pension from a previous employer of about $30,000 which he could access or roll over at any time. What would you suggest as options (IRA?) for my old pension money?

    • says

      @ Pam Great question. Personally, I’m a fan to taking control of the funds but it really depends on the following items:

      1. What is the monthly annuity amount offered? It looks like what they are offering you isn’t a “must keep” offer. It’s decent, but if you’re comfortable investing it, you could be better off.
      2. How likely are the individuals going to cash it out and blow it? Having freedom to access the funds at any time doesn’t mean you can cash out your IRA to buy Christmas gifts. Unfortunately, I see this happen all the time. They would have been better off leaving it with in the pension so they at least would have had some sort of income at retirement.

      • Pam says

        Well, we have no plans to do anything but roll it into another retirement account. Because we have always had something thru our employers I have never looked into an option outside of work. Don’t know if IRA is the best choice but don’t want to be hit with any penalties.
        The single life annuity would be $442/month but I don’t know when that would start or how long it lasts.
        Wouldn’t investing have penalties? Are there different kinds of IRAs?

  7. Mary Lou Paris says

    Hello Jeff,
    I am 581/2 and my former employer has offered me a lump sum of $42,000 from my pension plan. If I elect to stay in the plan, I would receive monthly payments of $404 upon retirement. Two important things: the retail company is not doing very well and has a good chance of going under. The other detail is that my family typically lives to be 80+. Would it make sense to take the lump sum, even if the monthly allotment could amount to $100,000 over my lifetime, or am I possibly going to end up with nothing?

    • says

      @ Mary The good thing is that your pension should be protected by the PBGC. You will want to verify this.

      With such an long life expectancy, it may be wise to go with the guaranteed monthly paycheck.

  8. says

    I have a pension that I can collect at 55 the lump sum at that age is 76,ooo or monthly payment of 515 a month for life. The company I used to work for offered a one time lump sum of 40,000… I am 41 would it be better to wait 14 years or take the 40-G and put in an IRA I was told buy a financial advisor he could double that at 8% every 9 years, not sure? I have 5 rentals that will be paid off when I’m 51 was planning on that for retirement too.

    • says

      @ Rick I think you can go either way with it. The one thing I wouldn’t believe is the financial advisor that can double your money every 9 years. Yes, there have been instances in the past where this has occured, but to make a blanket statement like that is wreckless and resembles that more of a used car salesman.

  9. Sam says

    I had a public school pension of 45% of my salary after age 65. I am 30 & don’t plan return to a public school service, which would be the only way to get the pension to cover 100%.
    After the pension manager lost some money by investing it in the market (thus increasing everyone’s mandatory contribution to cover current retiree’s) & reading news about various school districts & states nationwide reducing public school or employee retiement payments or starting to switch the pensions into more of a 401k investment vehicle, I decided cash out & roll the $ into a IRA. I don’t know if I had the right idea, however i feel safer having control of my own money & my retirement fund.
    Now if anything happens to me, my spouse gets the funds and if we both go, the kid’s get it. The pension didn’t cover the spouse until over age 60 or 65 and the kids were entiltled to nothing. If I was over 50 I probably would have kept it. I just didn’t want to loose it from poor handling & too many retirees pulling form the fund. Also I noticed the last few years the wording on the pension rules kept changing and i didn’t want ot be restricted out of being able ot pull my $. A freind who still works there said there is a large fee now to take the moeny out of the fund & roll it in to an IRA or other retirement acct.
    My Grandpa had a pension. He died 8 years ago & it has been very rough on my Grandma since the pension died with him.
    There is no right answer since every pension seems to be unique & each person has a different set of circumstances. I can’t find any fee based fin planners in my area so, I just do what allows me to sleep peacefully at night. So far that has worked, my retirement rollover IRA has performed very very well. I hope that remains the case as I get older.

  10. Bob says

    After the bankruptcies of General Motors and Detroit (with more to follow, I fear) I must join with the others who advocate taking control of your own pension funds.

  11. Brandon says

    I am being offered a lump sum of 8k (after 20% Fed tax). I had worked 10 years at a hospital. The other option offered is to roll over the 10k into an Ira, or receive $281 per month after I reach 65. They said I could start taking the monthly penison when I am 55 at a lower rate (which they have not specified). I am 47 years old and not sure what to do. My health is not so great but I am financially fine. Please advise me what I should do? Aside from the above options could I take the life time payout and invest it in stocks? I want to thank you for this wonderful article and sound financial advices you have provided.

    • says

      @ Brandon I typically advise people to roll it over into an IRA. That way you have control of the money. The pension sounds OK, but if your health is a concern then having access to the money will probably prove to be more valuable.

  12. Mike says

    If you have a pension amount around $4400 per month…..was offered $750k lump….and had a 401k of same amount…what would you do?

    • says

      @ Mike

      I’m 36, have a mortgage, and 3 young children, so what I would do is much different that what you should do.

      How old are you? Do you have any debt? What’s your monthly expenses? Do you want to travel? Do you have any children?

      It’s hard to suggest what you should do without knowing where you’re at in your life.

  13. Sarah says

    Hi, I’m 43 and was offered a cash out on an old pension of $33,000. If i take it I would rollover into an ira. If I do nothing I would receive 800. A month at age 65 for lifetime. I’m trying to decide if I can equal or exceed what the pension would be at 65 or if I should keep in pension. I’m married in good health with kids and an additional ira

  14. John says

    What has happened in Detroit is making me worry about my pension. The city I work in has a defined contribution plan. It is a 25 year retirement at 62.5 percent of base pay when you retire. If I stay the full 25 I start collecting the 62.5 immediately. If I opt for early retirement I would get 2.5 percent for every year I have worked, but do not collect until I am 56. I am 41 and I retire in 7.5 years (17.5 years on). The city I work for just raised the health insurance premiums to 100% for all retirees (effectively losing their insurance). They are then moving anyone with under 10 years on the job to a 401(a) plan, and no one will be paying into the pension once those with 11 years and up retire down the road. The city pension is not in good shape at this point.
    I am wondering if it is time to “cut and run” early or stay the further 7.5 years and get the pension. If I do leave I am needing to decide if I should take the early retirement and have something coming in when I turn 56, roll it over to a 401k, or roll it over to another employers plan (one of the new jobs I am looking at does not allow that though). Are city government pensions backed by anyone if the city of Memphis, TN goes the way of Detroit I wonder? Did I mention that I hate my job and count the hours until I leave? I am married with 2 kids, so its not about my happiness in my job, but their future well being. Any advice would be appreciated in regards to pension/retirement options (I know you cant tell me to stay or go). Thanks

      • John says

        Lump sum is 54,624.00 that I have in pension now. My yearly salary is 53,000. My math has me collecting 35,000 at age 49 if I stay the full 25 at 62.5 and 25,000 if I retire early at 18 years on. I was incorrect with not collecting until age 56, it is actually age 59.5 to get pension after early retirement. I also have 40,000 in a deferred comp plan. The new job is something I’ve always wanted to try but is a pay cut down to 38,000.

  15. Doris E Hayward says

    Hello, I am will be 59 in May 2015. I was just offered $21,163.48 from Aetna, my pension. One time only. I need to make a decision by Oct 3, 2014.
    Age 65 Single Life Annuity $232.26 – Immediate Annuity Only $ 120.79
    I have a 401 k at my job, American Red cross. $45,000.00 and i also have Lincoln Fin Group Annuniteis $25,000.
    What do you suggest that i do with my 21,000.
    thank you

  16. mike lowery says

    I have 750k lump…..a 401k that is 650k)….annuity would be 48k a year.
    I am 58…..with just a mortgage….what would you advise?

    • says

      @Mike Quick rule of thumb of getting 4% off all of your investments is $56k per year (before tax). Is the annuity just off the $750k? If so, that’s not a bad deal. Just depends if you want control over your money. If you ever want to setup a free chat to discus more, you can schedule it here.

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