First Person: Rolling Over My Old Pension to a Roth IRA

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When the company I worked for decided to sell, they offered their former employees the choice to receive a lump sum distribution of their retirement benefit. I could also choose to defer my monthly benefit until I reached retirement age in another 25 years.

Although some of the people I know decided to wait out for the retirement benefits, I didn't think the $150 I'd receive every month would boost my lifestyle by much. Most of the people who decided to wait for a monthly payment were just a few years away from retirement or had worked longer for the company.

After deciding to take the lump sum benefit, I still had to decide what to do with the lump sum.

Avoiding tax implications

I remember the horror story a close friend told me about how she was chased down by the IRS for not paying taxes and penalties when her employer shut down and offered employees a lump sum. Knowing that, I was careful to consider the tax implications if I just accepted a lump sum. Not only would I owe a 10 percent penalty, but I'd also have to pay taxes.

Consulting with my husband

My first step before making a decision was to talk to my husband. Since we both didn't want to wait to receive a small amount when I retire, we had to fill out extra paperwork in order to get a lump sum. We completed a spousal consent form that had to be signed by my husband and notarized. My husband said he thought it was best to roll the pension over into my existing retirement accounts.

Choosing the Roth IRA

I had the choice to roll the money to a regular IRA, Roth IRA or a 401(k) plan. With the regular IRA and 401(k) plan, I wouldn't owe any taxes. With the Roth IRA, I would owe some taxes, but we decided it was worth it. With the Roth IRA, our money can grow. When we take the money out during retirement, we won't owe taxes at that time. We decided it's better to pay the taxes on the frontend. Unlike just taking the lump sum, we wouldn't have to pay a 10 percent penalty by rolling the pension money into the Roth.

Doing a direct rollover

We decided it was safer to do a direct rollover into an existing retirement account as opposed to letting the plan administrator mail us a check directly. Even though we have 60 days after we received the payment to make the deposit, I didn't want the responsibility. Also, if we didn't do a direct rollover, the plan administrator would have to withhold 20 percent of the payment for income taxes.

Even though it wasn't a huge sum of money, it was nice to beef up my Roth IRA account with my former pension money. I envy people who work for companies that still provide pensions for their employees. I encourage my son to find jobs that still offer pensions. It's a lot of responsibility to have to manage my own retirement money, but it's something that must be done.

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More from this contributor:

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