Tax Benefit of Rollover Pension to IRA

by Michael Keenan ; Updated July 27, 2017
Rolling your pension perserves the tax-deferred growth of the account.

If you've been stashing your retirement savings in your employer's retirement plan, you might be wondering about your options once you leave your job. One option is to roll the money into an IRA. Doing so does offer some tax benefits, but won't give you a tax deduction in the same way making a contribution to a traditional IRA will.

Tax Deductions for IRA Contributions

When you contribute to a traditional IRA, you're allowed to deduct the amount that you put in if you're not covered by an employer plan, or if you are covered by a plan and your income falls below the annual limits for your filing status. For example, in 2015, if you have a 401(k) plan at work, you can't deduct any of your IRA contribution if your modified adjusted gross income exceeds $71,000.

No Deduction Rollovers from Pensions

When you roll over money from a pension plan, you're moving money for which you've already received a tax break. For example, say you have $150,000 in a 401(k) plan. When you made contributions to that account, those contributions didn't count as taxable income. So, when you roll over the $150,000 from your 401(k) to a traditional IRA, you don't get an additional deduction because you're just moving money from one tax-deferred account to another.

Continued Tax-Deferred Growth

One big perk about moving your pension to an IRA is that you get to continue the tax-sheltered growth instead of paying taxes, and potentially early withdrawal penalties, on the distributions. For example, if you empty your 403(b) plan after you change jobs, you must report the entire distribution as taxable income. And, if you're under 59 1/2, you owe an extra 10 percent penalty unless an exception applies. But if you roll it over to an IRA, the money continues to grow tax-free until you eventually take distributions.

Early Withdrawal Penalty Exceptions

Moving your pension to an IRA also allows you access to a few different early withdrawal penalty exceptions if you do need to take the money out before age 59 1/2. For example, if you take the early withdrawal from an IRA, you won't pay the penalty on any distributions taken to pay for higher education, including for your kids. You also won't pay the penalty on the first $10,000 taken out to buy a first home. However, the downside is that you lose the early withdrawal exception for distributions taken if you retire after turning 55 years old.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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