Roth individual retirement accounts and pension plans offer ways to save for retirement and on taxes. However, Roths and pensions are pretty different overall. If you leave your job, you might want to move your money from your pension to a Roth. If you do, there are usually tax consequences, whether you move your entire pension money in a lump sum or do regular transfers. Uncle Sam has other restrictions.
The easiest and most common way to move your pension money to a Roth IRA is to roll it over. A rollover is a tax-free transfer of money from one retirement account to another. The Internal Revenue Service lets you move cash from almost any type of plan to a Roth, including 401(k) plans, defined-benefit pension plans and other IRAs. However, you usually can't touch your pension plan money until you leave your job or reach age 65 with at least 10 years of service. Some plans may let you access your cash earlier.
If you haven't yet established a Roth IRA, you'll have to visit a financial services firm to open the account. They'll ask for some personal information like your name, address, Social Security number, date of birth, investment experience and the names of your chosen beneficiaries. After that, you'll have to contact your pension plan administrator. If you qualify for a rollover, give the administrator your Roth IRA account number, along with the name and account numbers at your bank or brokerage. Choose whether you want a direct rollover or an indirect rollover. With a direct rollover, your administrator will electronically transfer your pension to your Roth without you ever physically handling the money. With an indirect transfer, you'll receive a check for your funds and be responsible for depositing it in your Roth IRA yourself within 60 days.
A Roth IRA is an after-tax account, while a pension plan is a pre-tax one. Any money you move from a pension plan to a Roth will be fully taxable. If you decide to roll over the money yourself, rather than making a direct rollover, your plan administrator will hold out 20 percent of your rollover for taxes. If you have available funds, you can put the amount that was taken out of your rollover in taxes into your Roth yourself. That way, you'll end up with the full pension amount in your IRA. Typically, retirement plan withdrawals made before age 59 1/2 are also subject to a 10 percent early distribution penalty. However, since a rollover is not technically a distribution, you can avoid the early withdrawal penalty if you roll the money into your Roth IRA.
If your company doesn't offer a retirement plan, you can open and fund your own Roth IRA to save for your retirement. Even if you are covered by a plan at work, you can add to your retirement savings by opening a Roth. However, the IRS won't allow you to have a Roth if you make a lot of money. For 2013, the IRS limit on a couple filing jointly is $188,000 in adjusted gross income. You won't get a tax deduction with a Roth, like you might with a traditional IRA. However, you can typically take tax-free distributions once you are over 59 1/2.
- IRS: Rollover Chart
- U.S. Department of Labor: FAQs About Retirement Plans and ERISA
- IRS: Roth IRAs -- Rollover From Employer's Plan into a Roth IRA
- IRS: Topic 558 -- Additional Tax on Early Distributions From Retirement Plans ...
- IRS: Roth IRAs -- Are Distributions Taxable?
- Kiplinger: 2013 Retirement Account Contribution Limits
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