What Are the Benefits of Rolling a Pension Into a Roth IRA?

Tax rates always change, which can make it tough to figure how much you'll have to pay in taxes in retirement. By moving the money to a Roth IRA, you eliminate this uncertainty because qualified distributions from the Roth IRA are tax-free. In addition, if you're in a lower tax bracket in the year you convert to a Roth IRA, you get the added advantage of paying a lower rate than you might otherwise pay in retirement.

Once you've converted the money to a Roth IRA, all the future growth is tax-free. If you had left the money in your pension, the money would grow tax-free but it would all be taxed when you took distributions. For example, if you convert $50,000 to a Roth IRA in your 30s, and it grows to $250,000 by the time you're 60, you can withdraw the entire $250,000 tax-free.

Employer plans require you to start taking distributions from the account when you turn 70 1/2 or, if you're still working, in the year you retire. That will be done whether you need the money or not. Roth IRAs aren't subject to required minimum distributions, so you can take advantage of the tax-free growth as long as you live. In addition, when you die, you'll leave more tax-free money to your descendants.

When you leave money in a pension plan, such as a 401(k), you're restricted to investing in the options provided by your company. Depending on your investment tastes and the investment options offered, you might not like picking between a money market fund, a low-risk mutual fund investing in large-cap stocks and employer stock. A Roth has a few restrictions too, such as a prohibition on investing in collectibles. But you do get to choose the financial institution to handle a Roth, and you'll have complete control over the allowed investments.