Rolling Over Your Pension Plan Into IRA

Lately, I’ve had several clients that had a very important decision to make.   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.

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?

photo credit: prudencebrown121

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

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.

Securities offered through LPL Financial, Member FINRA/SIPC

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.

What happens with pension after company bankruptcy?

If you work for a company that has a pension, should you be worried?  What protections do you have?   Will all the money you have been paying into your retirement just be gone?    Recently, auto giant General Motors and electronic leader Circuit City filed for bankruptcy leaving many wondering “What happens to their pension”.   Whether you’re an employee of theirs or any other company that offers a pension, here’s what you need to know.

Insurance On Your Pension Plan

Fortunately, it is not as bad as most people think!  There are safeguards in the United States to prevent you from losing your pension plan.  In the United States every defined-benefit retirement plan is insured, at least to a point.  Most will receive all or at least most of their company pension even if your company goes bankrupt.  However, in some cases,  it may not be every penny you expected.

Also be sure to check out my article on, “Should I Roll My Pension Into an IRA” for some options on your pension plan.

What Happens When a Company Goes Bankrupt?

When a company goes bankrupt they have two choices.  They can reorganize and try to stay in business by reducing costs and attracting new investors, or they can liquidate.  The pension plan is usually terminated in reorganization and always terminated in liquidation.  So, then what happens?  A federal insurance agency called the Pension Benefit Guaranty Corporation (pbgc.gov), takes over the pension payments. Here’s some information on the PBCG taken from their site:

The PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 29,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

Only employees with the largest pensions actually take a hit.  The Pension Benefit Guaranty Corporation maximum annual payment, which rises with inflation, is $54,000 this year for workers who retire at age 65.  As with any insurer, the PBGC has some restrictions.  For example, it prorates recent pension increases.  However, in all, 84 percent of retirees get their full pension even after bankruptcy.

A Few Rare Cases Under Reorganization

In a few rare cases of a company bankruptcy reorganization, the employer maintains the its pension plan.  That normally only happens for one of three reasons.

1. The benefit is low
2. Employee turnover is high
3. The pension plan is new

Avoiding Bankruptcy is Better For The Company

photo credit: Mike Licht,

In most cases, however, it is always better for the company to avoid bankruptcy altogether.  In December of last year, Congress gave some help in this direction by relaxing the 2006 Pension Protection Act’s strict rules governing pension funding.  As counter intuitive as it may seem, this is one move that endangered workers should embrace.  As a result of this move, according to Dallas Salisbury, president of the non-partisan Employee Benefit Research Institute, ” Given the economic downturn, employees are better off than if the company was forced to make a large pension contribution”.  “It’s better to stay in business than make a pension contribution”.

GM Pension

In GM’s case they are filing for Chapter 11 Bankruptcy protection.  As a GM employee, I would be worried.  Really worried.  But the PBGC issued the following statement on June 1, 2009:

Although General Motors Corp. has entered Chapter 11 bankruptcy protection, its two defined benefit pension plans remain ongoing under GM’s sponsorship.  Both plans, one for hourly workers and one for salaried employees, continue to be insured by the PBGC, which guarantees benefits up to limits set by law.

In the meantime, GM employees seem to be protected.  But it all falls on the shoulders of the PBGC.

Strength of the Pension Benefit Guaranty Corporation

Just like the FDIC, the financial strength of the PBGC hardly ever gets questioned.   Unfortunately, these are unique times and it seems that no entity is out of harms way.  Lowering interest rates and rising corporate defaults has led to a $33.5 billion deficit in the first quarter of 2009 for the PBGC.  This is the largest deficit for the 35 year old agency which is an increase from the $11 billion deficit ending fiscal year 2008.  Acting director Vince Snowbarger says,

“The PBGC has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums. Nevertheless, over the long term, the deficit must be addressed.”

How Does This Affect You?

If your company files for bankruptcy or you fear that it will, I would contact the PBGC and talk to them directly.  Be sure to visit their website frequently and check for updates.  You are basically in their hands and you have limited choices.  If you have the option, consider rolling your pension into an IRA to get it out of your company’s hands.  I’ve had many clients do this so that they never had to worry about this.  Be sure to consult a financial planner and/or tax advisor before implementing this step.

*This post was featured in the Carnival of Pecuniary Delights @ Financial Nut.

Securities offered through LPL Financial, Member FINRA/SIPC

Jeff Rose is a Certified Financial Planner and co-founder of Alliance Investment Planning Group.