How to Complete a Pension Rollover to an IRA

Estimated reading time: 9 minutes

For generations, pensions served as a cornerstone of retirement security. They provided a dependable income stream for retirees after decades of dedicated service. However, retirement planning has undergone a significant change.

Defined benefit plans, once ubiquitous, gave way to defined contribution plans, such as 401(k)s, 403(b)s, and SIMPLE IRAs. This shift marked a profound change in how retirement is funded, transferring more responsibility to the individual.

As the prevalence of defined contribution plans continues to rise, individuals with defined benefit pension plans may find themselves at a crossroads. How can they effectively manage their retirement savings in this new era? What strategies are available for those seeking more control and flexibility over their retirement funds?

In this comprehensive article, we'll dissect the advantages, considerations, and actionable steps you can take to transition your pension into an IRA. Plus, we’ll consider the potential benefits that come with opening a self-directed IRA (SDIRA).

Table of Contents

• What is a Pension?
• What Happened to the Defined Benefit Plan?
• Can I Roll a Pension into an IRA?
• Benefits of a Pension Rollover to IRA
• Things to Consider Before Completing a Pension Rollover
• The Advantages of a Self-Directed IRA
• 7 Steps to Rollover a Pension to an SDIRA
• Consider a Pension Rollover at Entrust
  

What is a Pension?

A traditional pension is a retirement plan in which an employer sets aside funds for an employee's future retirement. It provides employees with regular income after they retire, typically based on a combination of factors such as the employee's salary history and the number of years they worked for the company. 

Generally, pensions come in two different forms:

Defined Benefit Plan: In this type of pension plan, the employer promises a specific benefit amount to the employee upon retirement, usually based on a formula that considers factors like years of service and average salary. The employer bears the investment risk and is responsible for funding the plan to ensure that it can meet its future obligations to retirees.

Defined Contribution Plan: In this type of plan, both the employer and employee contribute to a retirement account, which is often invested in various assets like stocks, bonds, and mutual funds. The eventual benefit at retirement depends on the contributions made and the investment performance. Examples of defined contribution plans include SEP IRAs and SIMPLE IRAs.

Today, when most people refer to a “pension,” they are generally referring to a defined benefit plan. These employer-funded retirement accounts have plummeted in popularity in recent decades.

What Happened to the Defined Benefit Plan?

Until the 1980s, defined-benefit pensions were a prevalent retirement benefit in industries like manufacturing, government, and some large corporations. 

In 1975, defined benefit plans made up the vast majority of active employer-based retirement plans, outnumbering defined contribution plans by nearly three to one. That quickly changed, with defined contribution plans becoming the de-facto retirement plan available to most workers.

A variety of factors led to their decline in popularity, including rising costs and increased worker mobility. Further, maintaining defined-benefit plans required ongoing funding from corporate earnings, impacting profits. To save money, many companies transitioned to defined contribution plans, like 401(k)s, primarily funded by employee contributions.

In the private sector, defined benefit plans have nearly vanished entirely. In March 2022, only 7% of private-sector, non-union workers participated in a defined benefit plan. The public sector tells a different story. 86% of state and local government employees still have access to a defined benefit plan. 

However, no retirement account is perfect, and defined-benefit pension plans are no exception. 

The Downsides of Defined Benefit Plans

While defined-benefit pensions offer some clear advantages, they come with certain limitations that may prompt individuals to seek alternative retirement strategies. 

These pension plans typically offer little to no control over how the pension funds are invested. The investments are managed by the plan administrators, which can be a disadvantage for those who prefer to have direct control over their investment choices.

Additionally, defined benefit plans are not very portable. If you change jobs, you can’t usually take the pension with you. This contrasts with IRAs or 401(k)s, which can be rolled over to a new employer’s plan or into a personal retirement account.

Further, the security of a defined benefit plan is often linked to the financial health of the employer. If the company faces financial difficulties or goes bankrupt, the pension may be at risk. Fortunately, most traditional pensions are insured by the Pension Benefit Guaranty Corporation. However, if you were anticipating a substantial benefit but the plan was not fully funded when the company collapsed, your payments could be reduced to the maximum guaranteed benefit.

For all these reasons and more, many pension holders may want to consider moving their funds into a more flexible, agile retirement account like an IRA. 

Can I Roll a Pension into an IRA?

Typically, you are able to roll the funds from a pension into an IRA, but there are some important considerations to keep in mind.

Take the time to review the plan documents, including the Summary Plan Description (SPD) and any related materials provided by your employer or plan administrator. 

Look for key information such as:

Vesting Status: The portion of your pension that you own and can take with you if you leave your job before retirement.

Benefit Amount: The projected benefit amount you would receive from your pension plan upon retirement. This will help you compare the potential benefits of leaving your funds in the pension plan versus rolling them over to an IRA.

Plan Rules: Restrictions, limitations, or rules associated with your pension plan. Some plans may have specific provisions regarding rollovers or eligibility criteria that you need to consider.

Not all pensions are eligible for rollovers into an IRA, so it's crucial to determine if your plan allows this option.

Benefits of a Pension Rollover to an IRA

Rolling over a pension to an IRA presents several potential benefits:

Enhanced Investment Control: With an IRA, you have the freedom to choose the holdings in your account. This flexibility enables you to tailor your investments to your specific financial goals and risk tolerance.

Potential for Diversification: By rolling over your pension into an IRA, you can diversify your investment portfolio more effectively. Diversification can help spread risk and potentially enhance returns. You're not limited to the performance of a single pension fund; instead, you can allocate your funds across various asset classes and industries.

Consolidation: If you have multiple retirement accounts from different employers, rolling them into a single IRA can simplify your financial management. It makes it easier to track and manage your retirement savings in one place.

Portability: An IRA is not tied to a specific employer, making it easier to manage your retirement savings if you change jobs or retire early. You won't be subject to leaving your pension behind or waiting for its distribution schedule.

Potential to Avoid RMDs: With an IRA, you can convert pre-tax funds into post-tax funds held in a Roth IRA. This may result in a hefty tax bill at the time of conversion but offers significant upside as well. Roth IRAs do not require account holders to take RMDs during their lifetime. This can be advantageous for those who want to leave a substantial nest egg to their beneficiaries.

Things to Consider Before Completing a Pension Rollover

While a pension rollover to an IRA presents several benefits, there are some important factors to keep in mind:

Personal Responsibility: IRAs give you more control over your investments, but they can also expose you to market volatility. Poor investment choices or market downturns can impact the value of your retirement savings.

IRA Fees: Some IRAs may have fees and expenses associated with them, such as annual maintenance fees or transaction costs. Be aware of these fees and assess their impact on your long-term returns.

Before making a decision, consider consulting with a trusted advisor who can provide personalized guidance based on your specific circumstances and retirement goals.

The Advantages of a Self-Directed IRA

If you’re comfortable with potentially higher fees and the personal responsibility that comes with an IRA, you may want to consider a rollover.

Before you do, you should be aware that most IRAs offered by a bank or brokerage limit your investment options to stocks, bonds, and mutual funds. These administrators simply don’t have the bandwidth to facilitate transactions with other types of assets like real estate and private equity. 

That’s where an SDIRA can open a new world of possibilities:

Expansive Investment Opportunities: Opening an SDIRA empowers you to diversify into a wider array of assets, like private lending, precious metals, and cryptocurrencies. By embracing asset diversification, your retirement portfolio gains the potential for enhanced resilience and higher returns.

Tailored Potential for Enhanced Returns: An SDIRA allows you to leverage your unique knowledge and expertise, especially in private and local markets. For instance, if you have an eagle eye for undervalued real estate, self-direction allows you to apply this insight to reap greater rewards than achievable through a target-date retirement fund.

Investing with Personal Values and Impact: Beyond financial returns, an SDIRA grants you the opportunity to invest in what truly matters to you. Whether it's backing local enterprises, such as your favorite neighborhood bookstore or an innovative startup, self-direction lets you align your retirement savings with your personal values, potentially contributing to the growth of your local community and economy.

Self-Directed IRAs: The Basics Guide Learn about your investment options, Self-Directed IRA rules, and much more! Download Now

While an SDIRA offers greater control and diverse investment options, it also brings heightened responsibility and potential risks. It's essential to conduct in-depth due diligence on all offerings. If necessary, seek expert advice to ensure your investment decisions align with your retirement objectives.

7 Steps to Roll a Pension into an SDIRA

Rolling over a pension into an SDIRA involves several steps, and it's essential to follow them carefully to ensure a smooth and compliant transition.

1. Determine Eligibility: Confirm that your pension plan allows for rollovers. Most defined contribution pension plans, such as 401(k)s, are eligible, but defined benefit plans may have different rules.
2. Select an SDIRA Custodian: Choose a reputable SDIRA custodian or administrator to hold and manage your SDIRA. Make sure the custodian has an experienced track record and provides ample resources to help you understand your responsibilities as an SDIRA holder. 
3. Open an SDIRA: At Entrust, all you need is 10 minutes of your time, a copy of a government-issued ID, and your credit card for the account establishment fee.
4. Provide Account Information: 
   1. Provide your pension plan administrator with the SDIRA’s account information, including the account number and the custodian's name and contact details. 
      1. This will allow the administrator to move the funds out of the account and into the SDIRA.
   2. Provide Entrust with a copy of a recent account statement from your previous custodian.
      1. That way, we can correctly match the incoming funds with the funds in the previous account. 
5. Complete Rollover Certification Form: Log into the Entrust Client Portal and complete the online Rollover Certification Form. Alternatively, you can complete a PDF or print-out of the Rollover Certification Form and submit it to Entrust through: 
   1. Email: Forms@TheEntrustGroup.com
   2. Fax: (510) 587-0960 
   3. Mail: The Entrust Group, 555 12th Street, Suite 900, Oakland, CA 94607 
6. Initiate the Rollover: Contact your pension plan administrator or HR department to request a rollover distribution. If you’d like to minimize risk, opt for a direct rollover rather than a 60-day rollover. With this approach, you never take possession of the funds, so no tax withholding is required.
7. Invest with Your SDIRA: That’s it! You’re ready to start self-directing your investments. Choose assets that align with your individual expertise and financial goals.

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If you find value in investing with your SDIRA at Entrust, you can share the opportunity with a friend. Once they join and fund their account, we’ll waive their account opening fee and slash $50 off your annual recordkeeping fees.

This way, you can both continue to grow your retirement savings more efficiently, maximizing the potential of your investments.

Consider a Pension Rollover to an SDIRA at Entrust

Moving your pension funds into an SDIRA presents a unique opportunity to redefine your retirement strategy. It's a chance not just to grow your nest egg, but also to invest in assets that resonate with your values and interests.

At Entrust, we understand that the journey toward a secure and prosperous retirement is deeply personal and often complex. That's why our dedicated team is committed to providing you with the resources, support, and guidance needed to navigate your rollover smoothly and efficiently. 

Have questions about your specific situation? Talk to one of our SDIRA experts today. They will be able to provide insights applicable to your situation and help streamline your transition once you’re ready to make the switch.

If you’d like more in-depth information about self-directed investing, download our SDIRA Basics Guide. Inside, we’ve included an overview of the SDIRA rules you need to know and specific examples of assets that an SDIRA can and cannot invest in.