Should I Roll my Pension to an IRA?

Welcome to this month’s Ask the CFP segment. This month’s question is, “should I roll my pension to an IRA?” This is a popular question and the answer may not be a clear as one would hope. Here are some topics to consider when weighing your options.

First, if your pension offers a lump-sum rollover and you decide to keep it with the pension, how well funded is that pension? A pension’s ability to pay a monthly benefit is generally only as good as it’s funding. Some pension funds have plenty of assets to pay for decades while others haven’t been funded as well. You can typically acquire this information from the pension sponsor as a participant.

Second, if you decide to roll the pension to an IRA to manage on your own, you’ll be assuming the risk of managing the money instead of the pension fund doing it for you. Some people enjoy having this kind of control over their assets while others prefer not to take on the risk.

Third, consider your longevity. If you’re not married and your health is poor, the idea of collecting a monthly pension payment for 25 years may not sound appealing. This might favor taking a lump-sum. However, if you have longevity in your family and a spouse that may depend on this income, you might prefer to have an income stream your spouse can assume once you’re gone.

You should also include the lump sum vs. pension options in a more comprehensive analysis looking at your full retirement picture.

Lastly and most importantly, unless the choice is obvious for health or family reasons, you’ll want to conduct an analysis on what rate of return you would need to earn on the lump-sum to make up for the lost pension payments. We have tools to easily run this type of analysis if you want help. You may notice that the average rate of return needed on the lump-sum becomes higher the longer you’re expected to live. You should also include the lump sum vs. pension options in a more comprehensive analysis looking at your full retirement picture. Sometimes including other life events in the equation will affect the projection, such as selling a business, receiving an inheritance or changing your retirement age. Because this decision doesn’t exist in a vacuum, looking at it individually and comprehensively is best. Taxes come into play that way too.

It’s not easy to make this decision, but hopefully this will help you weigh your options. If you speak with a professional, make sure they’re a fiduciary like Moneta who puts your needs first. If you have a question about this topic or have a question for next month’s video, please send it to [email protected]. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.