You need a full strategy to manage all of your retirement funds. For almost anyone employed by a major business (other than government employees), retirement pensions have become obsolete and mostly replaced with 401k accounts. However, the last of the Baby Boomers and many Gen Xers are still vested in traditional retirement accounts that are no longer getting the full attention of investment managers. If you have a traditional retirement pension that is now in the shadows, you may want to think about modernizing it in a way that gives you full control over your investments and distributions during retirement.
You can roll over a pension to a Solo 401k or IRA to fully control your retirement funds.
Businesses are Phasing Out Traditional Retirement Pensions
Traditional pensions are defined benefit pensions (which guarantee you a certain amount of money in your golden years) that are being phased out in favor of defined contribution plans, which require individuals to more actively manage both their contributions to the plans and how the funds are invested. Since you won’t be guaranteed a specific dollar amount each month with a defined contribution plan, managing the growth of your retirement funds is more important than ever.
A traditionally defined benefit pension that pays a lifetime annuity is typically based on years of service and final salary. That is how your monthly or annual payments are determined. According to the Department of Labor, the number of people with private business versions of these plans declined from 38% to 20% between 1980 and 2008. In contrast, defined contribution plans (owned and controlled by individual employees) increased from 8% to 31% over the same period.
More recently, many private employers have been and continue to freeze their older pension plans (according to the Government Accountability Office).
Most experts expect this trend to continue, with almost all private retirement pensions being frozen and eventually terminated.
Typically, a freeze involves limiting retirement benefits that current participants receive based on their accruals up to the date of the freeze. Current participants will no longer accumulate additional benefits, and new employees will not be covered. All employees will then establish new contribution-based plans or increase contributions to existing contribution-based plans.
Stop! Take a moment to think about what it will mean if the pension you have been looking forward to for 20 years is frozen at accumulations up to the date of the freeze, but you plan to work for another 15 years. That means that if you work for 35 years, your pension will only be worth the first 20 years of your employment.
If you want to continue growing your pension fund, learning how to rollover a pension into a Solo 401k or IRA could make all the difference in the quality of your retirement.
Pensions are tied to employers who, consequently, bear the responsibility for ensuring that employees receive pension benefits. In contrast, contribution-based retirement assets (e.g., Solo 401ks) are owned by employees who, therefore, bear the responsibility for their own financial security.
Will Your Pension Pay Enough at Retirement?
When your company cuts your pension, whether they freeze or terminate it altogether, employees need to take proactive action to protect the retirement savings they have earned so far and continue growing it to support them through their golden years.
If your pension is frozen, that usually means that benefits are closed to new employees, and current employees will stop accruing benefits, but the plan itself is still active. Since the plan is technically still active, most employers will make the employees wait until retirement age to take their benefits, either in lump-sum or annuity-based payments.
When a pension plan is terminated, the plan is no longer active, and the employees are often left with the choice to take a lump sum now or defer benefits to an annuity payment in retirement.
Both of these choices are based on the level of benefits at the time the plan is frozen or terminated.
Taking a lump sum allows you to rollover a pension into a Solo 401k or IRA to take full control of your investments. You do assume more risk for your investment decisions, but you are rewarded with more freedom, flexibility, and control over the money in your account.
By deferring your payments into an annuity in retirement, there is an implied “guarantee” for those monthly payments for the rest of your life and potentially your spouse’s life depending on the structure you select. But with so many companies defaulting on their pension payments, millions of workers experience drastic cuts to their monthly payments.
Consider this very real example that was featured in the Washington Post in 2018. A private equity firm purchased a chain of grocery stores only to sell off the assets later and file for Chapter 11 bankruptcy. The result was for the investors to recover all of their money but left
more than $80 million in debts to workers’ severance and pension funds. There are hundreds of more stories just like it. So many workers rely on their pension for money in retirement, and when those companies don’t deliver on their promises, many workers are left to clean up the mess.
When you rollover a pension to a Solo 401k or IRA, you take control.
Benefits of Rolling a Pension Into a Solo 401k or IRA
Let’s start with the two primary tax benefits you gain when you rollover a pension. The first one is vitally important to anyone moving the large sums of money involved with a retirement account. The rollover is tax-free as long as you properly deposit funds from a qualified pension into a traditional Solo 401k or IRA.
Second, once your pension is converted to a Solo 401k or IRA, you have significantly more control over when you pay taxes on distributions. Once your pension starts paying (often between ages 55 and 62), you have to pay taxes on the pension payments. If you move the money into a Solo 401k or IRA, you don’t have to take distributions or pay taxes until you reach the age for required minimum distributions – typically at age 72).
A Roth Solo 401k or IRA is another flexible option that you gain when you rollover a pension. This is another tax strategy where all of your future earnings are tax-free at the time of retirement distribution. However, you do have to pay taxes at the time of the conversion from a pension, but you can decide when the conversion happens. A common move is to leave your money in a traditional Solo 401k or IRA to start, then convert all or part of it to a Roth Solo 401k or IRA in a year you’re in a low tax bracket.
An entire world of investment options is another benefit when you rollover a pension into a Solo 401k or IRA. These are fully self-directed retirement accounts. Your pension is controlled by your employer. They decide what to invest in without you having any input. With a Solo 401k or IRA, you are in full control of your investments. Alternative investments are a major attraction and feature of these accounts. Rather than further risking your retirement funds on Wall Street stocks and bonds, you can diversify into real estate, private investments, cryptocurrency, tax liens, and much more. Alternative investments can earn much higher returns and be more stable than the low rate of return Wall Street investments that pension fund managers favor.
You also gain more flexibility with your personal finances when you rollover a pension. Your pension payments are scheduled, they come like clockwork each month, but you can’t change when they come. Because you are in full control with a Solo 401k or IRA, you can withdraw a lump sum as you see fit. Maybe you need a one-time lump sum as a down payment for your retirement home or a motorhome for traveling. Maybe it’s for an emergency or to help a grandchild with a college expense. It’s your money, if you think a lump sum is appropriate, you’ll be able to do it. Even if you haven’t reached retirement age, there are special rules that let you avoid penalties when you’re taking out money for several life events and situations. When you go with a Solo 401k, you can even borrow up to $50,000 before retirement and pay the loan back to your retirement account.
Reduced risk of losing part or all of your pension. We’ve already looked at situations when pre-retirees and retirees had lost all or part of their pensions when their employer entered bankruptcy or had other financial problems. You may even know someone that this happened to. When you rollover a pension into a Solo 401k or IRA, you no longer have to rely on your employer.
The only risk you have is the amount of investment risk you choose to take on.
How to Rollover a Pension Into a Solo 401k or IRA
The rollover is much easier than you might think. First, you need an established and knowledgeable plan provider. Our platform is the only one in the world of its kind that combines the strengths of both 401k and IRA accounts. We help you follow the IRS rules so that there are generally no taxes or penalties for making this move.
Because pensions are defined benefit plans, your employer pays you a fixed amount in retirement. For example, you might be able to retire with a benefit of 75% of your salary once you reach 25 years with the company and age 55. They will have rules about how much is paid out as a lump sum rather than as ongoing payments. The rules will probably be different if the plan is being frozen, terminated, or if you are cashing out a still active pension plan early. Your employer or previous employer can tell you how much the cash out will be at a specific point in time.
According to IRS Publication 575, if you take a lump-sum distribution, you can rollover into a Traditional Solo 401k or IRA and face no tax or early withdrawal penalty. Solo 401k accounts do have additional employment qualification requirements. Solo IRAs do not have these additional employment requirements.
For most people, a rollover to either a Solo 401k or IRA will be the most attractive option, as the income taxes and early withdrawal fees on a lump-sum distribution will otherwise be significant and not be an option for most people.
There are three ways to rollover a pension into a Solo 401k or IRA.
- Trustee-to-trustee (most common): You open a Solo 401k or IRA and fill out paperwork authorizing Nabers Group to withdraw your pension into your Solo 401k or IRA.
- Direct rollover: You open a Solo 401k or IRA and fill out paperwork telling your pension to transfer your funds to the Solo 401k or IRA.
- 60-day rollover: You receive a check from your pension. You have 60 days to deposit the money into a Solo 401k or IRA to avoid taxes. If your pension withholds taxes (not good), you must use other funds to roll the full distribution amount into your Solo 401k or IRA.
Nabers Group offers fast, easy, and compliant Solo 401k accounts for just $49/month. This is your path to the freedom of making alternative investments with checkbook control over your retirement funds. No setup fee is required.
- IRS Approved 401(k) Documents
- Ongoing Plan Maintenance & Support
- Unlimited Free Rollovers
- No Transaction Fees
- Bank, Brokerage, and Crypto Account Access
- Checkbook Control
- Line of Credit up to $50,000
- IRS Opinion Letter
- Form 5500-EZ Preparation
- One-Click Annual IRS Maintenance
Opening your Solo 401k involves very little work for a ton of benefits. Claim Your $61,000 Tax Deduction today! ($67,500 for those 50 or older.)
A Solo 401k retirement plan is easy to set up and allows for tax-deductible contributions much larger than an IRA or standard 401k… plus it puts you in control.