By: Frank Armstrong, CFP, AIF
The number of people that actually roll over their pension plans from one employer to another is very, very small. Most will find that a rollover to an IRA better fits their needs.
Still, in certain situations, it may be your best option.
- Costs and features
If the new plan might have lower costs than an IRA, and has all the features and investment choices you could wish, then it might be worth considering.
- Creditor Proofing:
A direct “trustee to trustee” rollover between qualified plans may not be subject to your creditors. So, you will continue to enjoy the same high levels of creditor proofing that a qualified plan provides in the new employer plan. This may be important if you have a potential claim that exceeds your insurance limits, or an outstanding judgment and your state protection from creditors for IRA’s is weak. For most investors it won’t be an critical consideration.
If you have a loan against your old employer’s plan, you must either pay it off or suffer the tax and penalties when you default. However, there may be a work around that can avoid this unfortunate result. Obtain a short term loan from your bank or family, pay off the loan to the old plan, roll over the entire amount, and then take out a new loan against the new plan. This, of course, assumes that the new plan provides for loans.
- Retirement between 55 and 59 ½
If you plan on an early retirement between 55 and 59 ½, but haven’t reached that age yet, you may have more favorable options under the new company’s plan than under an IRA. A rollover to the new employer’s plan will preserve those options.
Note: If your old employer plan contains low basis company stock, it would lose its special treatment if rolled over into either an IRA or your new company’s plan. If you find that it is an advantage to take a distribution of the company stock for tax purposes, do it first, and then roll over the balance.
The Conduit IRA
If your intent is to roll over your pension plan into a future employer’s plan, but don’t yet have employment lined up yet, you can still position yourself for a later rollover. Just open an IRA that consists solely of proceeds from a qualified plan, and then at a later time you can roll over into the new company’s plan. Make sure that the conduit IRA does not co-mingle funds any from a traditional IRA.