Rollover Pension To IRA? New option!
One of the most difficult decisions that people face when leaving an employer is whether or not to rollover their company pension to an IRA. It’s an especially difficult choice when you’ve worked at the same company for many years. If you choose to keep the money in your pension, the money will be distributed to you as an annuity. That is, you will get guaranteed payments starting in retirement for the rest of your life (and optionally your spouse’s as well), as long as the company does not go bankrupt. Plus you retain complete asset protection from creditors. But you lose all control over the money. It can’t be passed on to your heirs or used for any other purpose. Alternatively, if you take a lump sum – calculated as the present value based on current interest rates of an estimate of the future stream of payments – you can reinvest the money, use it to buy a vacation home, or whatever, and avoid any concerns associated with the future viability of the firm. But the creditor protections are weakened, and if you live an exceptionally long life and fail to manage the money properly, you could run out prematurely.
The IRS has recently finalized new rules that allow you to have the best of both worlds. Recognizing that it is not beneficial to force participants to have to make an all-or-nothing choice, they now allow you to take a lump sum from just a portion of the pension and a lifetime stream of payments from the remainder. How much you allocate to each would be up to you.
Personally I think this is an excellent change that has been too long in coming. (The rule was first promoted in 2012 and was finalized after lots of public comment in late 2016). However, plan sponsors are not required to offer this benefit to employees. In fact there are still plans that do not allow lump-sum distributions at all. It is totally up to the plan sponsor to decide if and when to implement such a change.
Such flexibility also has a darker side. If you think the decision as to whether to take a lump sum or an annuity from your pension was challenging, this feature makes it even more complex. You not only have to decide what to do, you have to determine how much to allocate to each. For this reason I recommend that if you expect to be facing such a choice, be sure to put together a detailed retirement plan before leaving the company. It is only by comparing the alternatives in the context of all your future expectations that an appropriate lump sum/annuity mix can be calculated.
Unfortunately in today’s world, there are fewer and fewer pension plans (also known as defined benefit plans) available to private-sector employees. If you are fortunate enough to have one, or have a public-sector job that includes such a plan, its value to you as a flexible source of retirement funding has now been enhanced.