If you have a tradition defined benefit pension plan Where you work, you may have the option to receive the money as a lump sum when you leave your job or retire. One option is to transfer your retirement funds to another account. Roth individual retirement account (IRA). Discover the advantages and disadvantages of rolling over your retirement to a Roth IRA.

Converting a Pension to a Roth IRA: Overview

The two main types of employer retirement plans include: defined contribution plan and a defined benefit plan, commonly known as a traditional pension.

Defined Contribution Plan

With a defined contribution plan, for example 401(k) or a 403(b)you contribute from your paycheck and your employer match some of your contributions. With a defined contribution plan, you decide how the money is invested within the options the plan offers.

Defined Benefit Plan

With a pension or defined benefit plan, your employer funds the plan and promises you a certain benefit in retirement, usually based on your salary and years of service. Your employer makes investment decisions and is responsible for delivering promised benefits.

Quitting a job

When you leave your job, you can usually take the money from your defined contribution plan with you. However, you may not be able to take your defined benefit plan with you unless your employer’s plan rules allow it. When you retire, your defined benefit plan may give you the option of regular payments or lump sum payments for the rest of your life.

amount Wholesale It will be calculated based on your age, interest rates, the value of future benefits you will be entitled to and how much you will benefit. acquired in the plan.

If you are leaving your job, you can often leave your pension to your employer and start receiving monthly benefits once you reach retirement age, unless your employer states otherwise. ending retirement plan.

In some cases you will have no choice; If your pension is worth $5,000 or less, your employer is allowed to transfer it to you in a lump sum, whether you want it or not. This is called cash out.

Advantages of Transferring Your Retirement to a Roth IRA

Tax-Free Withdrawal

After your money is in the account Roth IRAYou’ll enjoy all the tax benefits of a Roth. After you’ve had a Roth account for at least five years, your withdrawals will be tax- and penalty-free as long as you’re age 59½ or older. There are also some flexible Exceptions to these rules.

More Control Over Investments

with one Roth IRAWhile your employer makes decisions about your retirement, you’ll have control over how your money is invested. For example, You can invest more aggressively If you’re willing to take on additional duties than your employer does in the hope of a higher return, risk.

Easier Access to Your Money

Due to flexible exceptions for early withdrawal, you can withdraw money from the safe. Roth’s almost always (although there are taxes and penalties). You generally have to wait until at least age 59½ before you can buy anything with your pension. However, some defined benefit plans allow loans.

No Required Minimum Distribution (RMD)

Non-Roth retirement accounts, such as traditional IRAssubject to required minimum distributions (RMDs) After reaching age 73 (for those born between 1951 and 1959) or age 75 (for those born in 1960 or later). Your employer’s defined benefit pension may also require you to start taking distributions at a certain point. In both cases, you will have to pay taxes on the money you receive.

A Roth IRA does not require you to withdraw money during your lifetime, allowing you to leave the entire account to your heirs if you wish and can afford it.

Disadvantages of Transferring Your Retirement to a Roth IRA

You Will Owe Upfront Tax

If you decide roll If you roll over a lump sum of your pension into a Roth IRA, income tax debt money as in other currencies Roth IRA contribution. After that, the money in your Roth will grow tax-deferred and become eligible for completely tax-free withdrawals if you follow the rules.

Investment Responsibility

Rather than leaving the burden to your employer, it will be your responsibility to decide how to deposit the money into your IRA. Depending on how comfortable you are, you may see this as an advantage or disadvantage. manage investments.

No Warranty

When your money is included in a retirement plan, your employer promises that you will receive a certain dollar amount of benefits in the future. While some employers may not be able to keep their promises for one reason or another, your benefits may be insured by federal insurance. Pension Benefit Guaranty Company. However, Roth IRAs carry no such guarantee.

When a Retirement to Roth IRA Rollover Makes Sense

If your retirement lump sum is relatively small, rolling it over to a Roth IRA and paying taxes on the money now can be a worthwhile trade-off, especially if you’re young and your Roth IRA will have years or even decades of growth ahead of it. because this money will come to you tax-free in retirement.

Consider Your Tax Bracket

You’ll want to be more careful when it comes to a larger amount. One thing is yours tax bracket. If you roll over your retirement income to a Roth, it may move you into a higher tax bracket for that tax year.

For example, let’s say you’re single and modified adjusted gross income (MAGI) $100,000 annually. As a result, your top marginal tax bracket in 2024 will be 22%, ending at $100,525. The next highest tax bracket is 24%. So, if you roll over a $50,000 lump sum to a Roth, you’ll fall into the 22% tax bracket on the first $525 and the 24% tax bracket on the remaining $49,475.

Switching to a Traditional IRA

One way to reduce your tax cost is to roll your lump sum into a traditional IRA and transform it It evolved into a Roth IRA in stages. You’ll still owe taxes on the money you convert, but you’ll have some control over the tax bracket.

With a traditional IRA, you won’t owe any taxes on the rollover as long as you follow the rules of either. direct transfer or a 60 day rollover.

In a direct rollover, your pension administrator will transfer the funds directly to the financial institution that will hold your IRA or issue a check to that institution for you to deposit. The pension administrator will send you a check and you will have 60 days to deposit all or some of the money into the IRA; The trustee will also withhold 20% for taxes. If you miss the 60-day deadline, you will owe taxes on the full amount.

However, if you are near retirement age, you may be better off either leaving your retirement money with your employer or rolling it into a traditional IRA and not a Roth. In either case, you will have to pay taxes on the distributions you receive, but you may be in a lower tax bracket.

In conclusion

If you have a traditional pension at work, you may have the option to receive a lump sum payment when you change jobs or retire. You can then reinvest this money. if you roll it into a traditional IRAYou won’t have to pay any taxes until you make a withdrawal. If you choose a Roth IRA, you’ll have to pay taxes on the money upfront, but your future withdrawals may be tax-free. If you decide to opt for Roth, you can reduce the tax impact by depositing the money into your account first. a traditional IRA and converting it to a Roth IRA over a series of years.