Can a Pension be Rolled Over to a 401(k)?
Like many retirement plans, you can roll over a pension (like the Motion Picture Industry Pension) into a 401(k) — provided the pension plan is considered a qualified employee plan. As another rollover option, you can also roll over a traditional pension plan to an IRA under the same guideline.
To be considered a qualified employee plan, a pension plan:
- Meet IRS requirements in both form and operation
- Must comply with ERISA requirements (Employee Retirement Income Security Act of 1974)
- May allow employee and employer contributions
Most 401(k)s, 403(b)s, profit-sharing plans, and other employer-sponsored retirement accounts are considered qualified employee plans. For more information about which plans are and are not considered qualified, check out the IRS page on common qualified plan requirements.
To be eligible for a pension plan rollover, you must have either separated from your employer, or the company must have terminated the pension plan, rendering it inactive.
Rolling over your dormant retirement funds — especially if you’re not receiving the value or service you think you should be — can make a lot of sense with regard to retirement planning.
If you’re having trouble locating your old employer’s 401(k), try our free 401(k) finder tool today. You can also try finding your account using your Social Security number.
When Should You Roll Over Your Pension to a 401(k)?
Keeping track of retirement plans from previous employers not only makes managing your financial planning easier from a logistical perspective, but it also can save a ton of money.
Much of our own research indicates that leaving money in a dormant retirement plan can cost an individual investor up to $700,000 over their lifetime—this is primarily due to excessive fees and suboptimal investment options.
As mentioned, the two times you’re eligible to roll over a pension into a 401(k) or IRA (Individual Retirement Account) is if:
- You separate from your former employer, or
- Your company terminates their pension plan
If either of these events happen, you can either take a lump-sum distribution of your defined benefit plan (which will come with ordinary income tax and possibly early withdrawal penalties) or you can roll it over into a retirement account of your choosing.
As with any major financial decision, consider working with a qualified financial advisor before making a choice about what to do with your retirement savings.
Rules on Lump-Sum Pension Payouts
If you’re at least 55 years of age, and you separate from your employer, or your pension plan is terminated, you’re eligible to receive a penalty-free lump sum distribution of your pension benefits. Note that any withdrawals will still be included in taxable income for the year you take them.
The keys to avoiding the 10% early withdrawal penalty are your age (must be at least 55, according to the Rule of 55) and the circ*mstances surrounding your pension plan (you must have left your employer or the pension plan must have been terminated).
If you take a lump-sum payout from your pension plan and either or both of these conditions have not been met, you’ll face a 10% early withdrawal penalty on the entire distribution, plus ordinary income tax. Ouch!
On the other hand, if you decide to roll your qualified employee pension plan to another retirement account, like a tax-deferred 401(k) or traditional IRA account, you’ll be able to preserve the account’s tax status and avoid the early withdrawal penalty altogether. The IRS considers this a tax-free rollover, as you’re really just moving money between financial institutions—not taking it as a withdrawal.
If you do opt for a pension rollover, always make sure that you roll your pension into another account with the same tax status (i.e., a pre-tax pension plan to a pre-tax 401(k), or a Roth pension plan to a Roth IRA). Rolling over a pre-tax pension plan to a Roth IRA can cause major tax problems, so be careful!
One additional caveat: Rolling over a pension plan into an IRA means waiting until you turn 59½ before taking out funds penalty-free, as the Rule of 55 doesn’t apply to IRAs. IRS rules around qualified plans can be tricky, so be sure you understand the tax implications of any financial decision before you proceed.
