If you've been laid off or are changing jobs, you may be wondering if you can put your pension money into a Roth IRA. The good news is, yes, you can. In fact, the process is easier than ever, thanks to changes in federal law. But because you'll need to receive the money as a lump-sum pension distribution to roll it into an IRA, you may want to talk to a financial planner about whether that option, versus taking monthly payments, is best for you. Also ask if a Roth or traditional IRA is right for your situation.
In the past, if you wanted to transfer money from a pension plan into a Roth IRA, you had to roll the funds into a traditional IRA first, then convert that IRA to a Roth IRA. As of 2008, the federal government has eliminated the first step, so you can roll the money directly into a Roth IRA.
To initiate the rollover, open a Roth IRA and get an account number. Then fill out a form from your pension plan's administrator to request a lump-sum distribution and provide the account number where the money should be sent. Some plans may require additional paperwork. There is no limit on the amount of money you can roll over from a pension plan to an IRA.
If the pension plan allows it, have the funds transferred to your Roth IRA as a direct rollover. Otherwise, the money will come to you as a check made out to your IRA's custodian, and you'll be responsible for mailing it to the custodian and making sure the money is in the account in 60 days. If it's not, you could face a 10 percent IRS penalty for early withdrawal of retirement savings.
Even though you are rolling the lump-sum distribution into a Roth IRA and not actually receiving the money, you will have to pay taxes on the full rollover amount at the end of the year. That's because the money contributed to a pension plan is pre-tax money, while a Roth IRA holds after-tax funds. Try to pay the taxes with money from your non-retirement accounts, so you will keep all of your retirement funds growing. If the lump sum you are rolling over is large, you can reduce the tax bite in any given year by rolling the money into a traditional IRA, then rolling the balance into a Roth IRA in stages over multiple years.
You can't contribute to a Roth IRA if your income is too high. The limit exceeds $100,000 for a single person. Check the link to the IRS website below for the most recent income limits on Roth IRAs. You also can't roll a pension into a Roth IRA if you are married but file your taxes separately.
As of 2010, a separate $100,000 income limit imposed on those wanting to convert a pension to a Roth IRA is lifted.
- Rolling Over Pension to Roth IRA
- IRS on Roth IRAs
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed April 20, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed April 20, 2020.
- Internal Revenue Service. "Income ranges for determining IRA eligibility change for 2021." Accessed November 1, 2020.
- Internal Revenue Service. "IRA FAQs - Contributions." Accessed April 20, 2020.
- Internal Revenue Service. “Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs).” Accessed April 20, 2020.
- Internal Revenue Service. "Rollover Chart." Accessed April 20, 2020.
- Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions." Accessed April 20, 2020.
Gene Erik is a copy editor with Demand Media Studios.