401K & Pension Rollovers

There are two common types of pension plans – Defined Contribution and Defined Benefit.

Members of Defined Contribution plans generally contribute a certain percentage of their income each year and the company matches it. On the other hand, Defined Benefit pension plans are designed to pay an employee a monthly income for life in retirement. The amount is calculated using a formula that is usually based on salary and years of service and typically you’ll receive money for the rest of your life. This means the employee does not incur any of the investment risks. Additional features may be included such as survivor benefits, guarantee periods and annual indexing.

On the other hand, those with a 401(k) or other types of defined contribution pension plan usually have two options when they retire. Either leave the funds where they are to be withdrawn at a later date, or transfer them to into a personal account, either a Rollover IRA (Individual Retirement Account) or Traditional IRA. This can be done without triggering tax consequences at the time and the money remains tax-sheltered as long as it remains in the account. There are regulations as to the timing and procedure in order to keep the transfer tax-free, which is why it is important to consult with a qualified financial advisor prior to initiating the process. When deciding whether or not to transfer your pension, there are also a number of other questions to consider:

  1. Do you have other sources of retirement income or will you need to rely entirely on your pension?
  2. Do you want to be able to control your taxable income by increasing or decreasing your withdrawals?
  3. What is your risk tolerance – are you comfortable being responsible for the investment choices inside your pension?

If you will have other sources of income in retirement and will not be relying fully on this pension you will be in a better position to withstand market volatility. Moving your money into an IRA also provides some tangible benefits. You will now take control of all decisions regarding your retirement funds. While most pension plans offer a limited range of products to choose from, once the money is in your IRA you will have access to a much greater array of investment choices. Some companies also offer a limited amount of investment guidance, but by transferring your funds to a private account you will benefit from the experienced counsel of a dedicated financial advisor with extensive investment knowledge who can outline the pros and cons, as well as pinpoint issues that may be specific to your particular situation.

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Meeting with a Front Range Financial advisor is an important first step towards securing your financial future. It is an opportunity to get to know an advisor and share your goals and aspirations.

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