What to Do When Your Pension is Terminated

As traditional pension funds continue to go the way of the typewriter all across America, you may find yourself in the position of having to decide what to do with a pension plan that’s being terminated by your employer. Fortunately, that doesn’t mean the money disappears. It just won’t be added to anymore and you have to choose what to do with the money. While this may sound like the kind of thing you’d rather not deal with, these come with an expiration date and a default option that may not be your best choice. So let’s look at the pros and cons of some common options.

1) Take an annuity.

Pros: You get a guaranteed income you (and possibly a survivor) can’t outlive and there no penalties regardless of your age.

Cons: The decision is generally irrevocable and you usually give up access to the money, future investment growth, and the ability to pass it on to heirs.

Best for: This really only makes sense if you’re about to retire and are worried about running out of money in retirement. Just make sure you have enough money somewhere else to cover emergencies and that you can’t get a better deal by taking the cash and buying an immediate annuity somewhere else.

2) Cash out a lump sum.

Pros: You get all the money to use right now.

Cons: You have to pay taxes on it and if you’re under age 59 ½, probably a 10% penalty. You also lose the option for tax-deferred growth.

Best for: If you need the money for an emergency (like preventing foreclosure of your home or repossession of your car) or to pay down high interest debt. If you don’t need all the cash, you’re better off rolling it to an IRA and only withdrawing what you need so the rest can continue growing tax-deferred.

3) Roll it into your current employer’s retirement plan.

Pros: You can continue deferring taxes, you can consolidate your accounts, you have access to your plan’s investment options and tools, you can borrow from it, and you access the money without a penalty as early as the year you turn age 55 as long as you work there until then.

Cons: You’re limited to the investment options in your plan.

Best for: If you want to keep things simple in one retirement account and/or you have investment options or tools in the plan that you don’t have access to otherwise. Keep in mind that anything you roll in can generally be rolled out to an IRA later.

4) Roll it into an IRA

Pros: You can defer taxes and have the most flexibility in how the money is invested and withdrawn (penalty-free for education expenses and up to $10k for a home purchase if you haven’t owned a home in the last  2 years).  You also have the  option of paying the tax on the money now and converting it into a Roth IRA, which grows to be tax-free after 5 years and age 59 ½.

Cons: If you don’t have an existing IRA, you have to open one. Some IRAs have higher fees than your employer’s plan.

Best for: If you have an advisor that you want to manage your money, you want to invest in something not available in your plan, or you want to use the money for education or a home purchase. You can generally roll the money into your employer’s plan later if they accept rollovers.

Personally, I’ve never had to make this decision but if I did, I would roll it into an IRA because I like having more control over it. That being said, most employees I’ve spoke to choose to roll it into their employer’s retirement plan. What would you choose?

 

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