If you are lucky enough to work for a company that offers a pension, you may be faced with a major decision at retirement: to roll over or not to roll over. In other words, should you take a lump sum distribution at retirement or receive a monthly check during retirement? The choice you make can affect how you live in retirement, and what you can leave your heirs.
While pension plans, or defined-benefit plans, are meant to provide a certain amount of security in the form of monthly cash distributions, because retirees have no say in how pension plan money is invested, they have no opportunity to increase their monthly cash distribution.
One way to exercise more control and perhaps increase the value of your pension plan distribution is to take a lump sum distribution at retirement and roll it into an IRA. An IRA offers you greater flexibility for accessing and investing the money. Assets in a rollover IRA may be invested in mutual funds, individual stocks and bonds, and other investments that align with your financial, wealth transfer and retirement goals and your investment risk tolerance. Because IRAs are tax-deferred, taxes are only paid when you take a distribution from the IRA, which allows investment earnings to grow free of tax until you take a distribution.
Before rolling over your pension to an IRA, the following should be considered: 1. IRAs are not guaranteed, if you invest aggressively or inappropriately or the market fails to perform as you expect it to, you run the risk of reducing the value of your pension or perhaps outliving your assets, and 2. a rollover to an IRA from a qualified plan is protected from the claims of creditors in bankruptcy.
Here are some additional factors to consider:
Your company's future
If you stay in your company's pension and select the lifetime income option, the maximum annual benefit insured by the Pension Benefit Guaranty Corporation in the event your company goes bankrupt is $55,840.
Pensions are meant to provide retirees with income for the rest of their lives. However, if the pension holder passes away, depending on the annuity option chosen, the surviving spouse typically receives a reduced benefit of at least half of the amount the plan holder would have received. Once the surviving spouse dies, any remaining pension benefit remains with the pension plan. With an IRA, you can elect a beneficiary to receive the IRA upon your death, such as another family member or a charity, assuming there are still assets left in the account.
If you were to roll your pension into an IRA, you would be required to take minimum distributions from your account, and pay taxes on them, once you reach age 70½. Such requirements might not be an issue if you planned to begin withdrawing assets before you reach 70. But if you retire later in life and want to begin drawing down your funds after 70½, the requirement may cause you to incur tax on distributions before you want to.
Typically, fixed monthly pension payouts will not keep pace with inflation. Some pension benefits have a cost of living adjustment built in, but most do not. So if you're concerned about the declining value of your assets due to inflation, the lump sum option might be more suitable for you.
So is an IRA rollover right for you?
The most important thing is to review your pension options in the context of your overall financial picture. Do you have other substantial sources of retirement income? Are they enough to fund your lifestyle, or will you need the pension income to do so? How important is leaving assets to your heirs or charity?
A qualified financial professional can help you identify your objectives, determine the costs associated with them, and decide whether a monthly check or rollover IRA is more appropriate given your circumstances.
Neither UBS Financial Services Inc. nor any of its employees provide legal or tax advice. You should consult with your personal legal or tax advisor regarding your personal circumstances. Financial Planning services are provided in our capacity as a registered investment adviser. As a firm providing wealth management services to clients in the U.S., we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. This article has been written and provided by UBS Financial Services Inc. for use by its Financial Advisors. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at www.ubs.com/workingwithus. UBS Financial Services Inc. is a subsidiary of UBS AG. ©2012 UBS Financial Services Inc.