I recently quit working at a place and had a Pension Plan set up there. Well since I am no longer employed by them, I now need to either cash out my Pension Plan or set up an IRA to transfer the money into. My question is this, which is better? and where would I place the money? If it is to go to an IRA then how do I go about doing that where my money wont disappear? Please help me to understand this better.
Thank you for the great question. I’m going to assume that when you say “Pension” plan, you are referring to a defined contribution retirement plan with a balance, such as a 401(k) plan. A true pension (or defined benefit plan) usually offers to pay you an income stream during your retirement. So, if you have a 401(k) type of plan, and assuming your former employer’s rules don’t require you to move the funds out, here are your typical options:
1. Keep the funds where they are. Again, if your former employer doesn’t require you to move the money out, then this may be a good option. Generally, retirement plans may offer greater creditor protection, and may allow you to annuitize your money later at a competitive rate.
2. Roll the funds into your new employer’s retirement plan. You may enjoy the same benefits of option 1 in this case.
3. Roll the funds into your own IRA. If you don’t already have an IRA established, you can open one to receive the liquidated funds within your old plan. An IRA may offer more investment options, and the provider may offer financial advice as well.
4. Cash out the retirement plan. Usually not a good idea, as you may incur penalties (if you’re under 59-1/2), and potential taxes, if the funds consist of pre-tax contributions. By cashing out, you are also putting your retirement in jeopardy.
The bottom line is to look before you leap. Consider what is most important to you such as: fees, where you will receive the most financial advice, creditor protection, or future annuitization. Regardless, of where you decide to put your money, you should select a diversified portfolio that matches your goals, risk tolerance, and capacity to take on risk.