Can I Convert a Pension to an IRA?

A person could live up to 25 years or more in retirement, and he must plan carefully in order to have sufficient resources to live on after he stops working. An employee can often convert a company retirement plan with a cash value to an individual retirement account, or IRA. This is beneficial because it gives the account owner more flexibility and control in managing his money. In addition, placing money in current market funds within an IRA can help keep up with the drastic rate of inflation.

Pension Conversion Guidelines

In order to convert a pension to an IRA, the account owner must be at a point where he can withdraw, or take distributions, from the pension plan. This usually happens at retirement age, but may also happen when an employee leaves active service with the sponsoring company. It is generally not possible for an employee still actively employed to take a cash disbursement from an employer-sponsored pension.

In addition, even if the individual has reached retirement age, every pension has a vesting period. This means that funds cannot be accessed for ​3-5 years​ of employment. The time period is particular to the pension and the employer as well as the Federal guidelines.

Read More​: Pension Rollover Rules

Cash Value Pensions

Cash value pension plans are a type of defined benefit plan. This may be a plan where the employer's pension plan promises to pay a certain amount each month to the employee until she, and possibly her spouse, die.

Some of these plans allow the employee the option to take a cash amount in lieu of the monthly payments. This cash value or lump sum of a defined benefit pension may be converted or rolled over into a traditional IRA to delay taxes and allow the balance to keep growing sheltered from additional income taxes.

401(k) Rollover to IRA

A 401(k) is also a defined contribution retirement plan, where the employee participates in the plan with his own contributions. The employer may match these contributions up to a certain percentage. If the employee is in a position to receive distributions from the 401k plan, such as when she leaves employment with the company sponsoring the plan, she can directly roll the 401k money into a traditional IRA, without incurring income taxes or penalties on the rolled-over amount.

401(k) to Roth

If a person has a Roth 401(k) account, it can be converted to a Roth IRA with ease. A traditional 401(k) can be converted to a Roth with some extra planning. The 401(k) owner can roll the money into a traditional IRA, without taxes and penalties. He can then convert the traditional IRA to a Roth by filing a conversion form.

He will need to pay taxes at his regular income tax rate on the converted money. The Roth account will then continue to grow, and any withdrawals from that account at retirement age will be tax free.