Understanding Your Pension Rollover Options: A Complete Guide to IRA Transfers

When your employer closes its defined benefit pension plan or you’re leaving the company, you’ll face a critical decision: should you execute a pension rollover to an IRA, or stick with taking monthly payments? This choice carries significant tax and financial implications that many people get wrong. Let’s break down what you actually need to know before moving forward.

The Shift Away From Traditional Pensions

The landscape of retirement benefits has changed dramatically. During the 1980s, roughly 60% of private-sector companies provided workers with traditional pension plans—most structured as defined benefit arrangements. Fast forward to today, and only about 4% of private employers still offer these plans. As companies phased out defined benefit plans, they increasingly pushed employees toward alternatives like 401(k)s or encouraged a pension rollover into Individual Retirement Accounts (IRAs).

This wasn’t coincidental. Employers shifted the investment risk from the company to individual workers, making IRA transfers and 401(k) plans their preferred solutions.

Can You Actually Roll Over Your Pension Into an IRA?

Here’s the straightforward answer: usually yes, but with important caveats.

Most pension plans qualify for a rollover, but two specific conditions must be met:

First condition: Your pension plan must be a “qualified employee plan” under IRS rules. If your contributions were tax-deferred, you almost certainly meet this requirement. Verify this with your plan administrator before proceeding.

Second condition: You must either be leaving your employer (through retirement or resignation) OR your company must be closing its pension plan entirely. Some states have made exceptions—certain public school teacher pensions, for example, cannot be transferred to an IRA—so check your specific plan documents.

Pro tip: Contact your plan administrator before initiating any transfers to confirm you meet both conditions and understand the mechanics.

Key Tradeoffs When Moving a Pension Rollover Into an IRA

Before you commit to a pension rollover, evaluate these important factors:

Investment Control vs. Simplicity

With a company pension, your employer manages the investments. When you roll over your pension into an IRA, you gain complete control—stocks, bonds, mutual funds, and alternative investments are all available. This flexibility is valuable if you have a clear investment strategy, but it requires ongoing management and decision-making on your part.

Early Withdrawal Rules Matter

This is where many people stumble. Under a traditional pension plan, you can withdraw funds penalty-free starting at age 55. But if you execute a pension rollover into an IRA, you must wait until 59½ to avoid a 10% penalty on withdrawals. Yes, exceptions exist for qualified education expenses, medical bills, or first-time home purchases—but these are narrow.

Tax Treatment Differences

Rolling a traditional pension into a traditional IRA is a tax-neutral event; you only pay taxes when you eventually withdraw. However, a Roth IRA rollover triggers immediate taxation on the entire amount. This is a crucial distinction that should factor into your decision.

Borrowing Ability Disappears

Traditional pensions often allow you to borrow up to 50% of your account balance for emergencies. Once you roll over your pension into an IRA, this option vanishes. This matters if you value liquidity options.

Creditor Protection Weakens

Funds in a qualified pension plan have strong legal protection against creditors and bankruptcy claims. IRAs offer less protection—though this varies by state. Research your state’s IRA creditor protections before making your decision.

Company Stock Complications

If your pension includes company stock, timing matters. Distributing appreciated company stock before age 59½ triggers ordinary income tax plus a 10% penalty. But if you wait until 59½, you’ll pay ordinary income tax on the cost basis and long-term capital gains rates on the appreciation—a potentially significant tax savings.

Can You Keep Working After a Pension Rollover?

Yes, with restrictions. If your company is closing its pension plan, you can work elsewhere and complete the rollover. But if you’re rolling over your pension while still employed at that company (and the plan isn’t being terminated), you typically can’t keep that job and execute the rollover simultaneously.

That said, you could retire and pursue an encore career, freelancing, or gig work—the rollover doesn’t restrict these paths.

Making Your Decision: The Bottom Line

A pension rollover into an IRA is a significant financial move with lasting consequences. Your decision tree should look like this:

1. First question: Do you want predictable monthly income or a lump sum you control?
2. Second question: Can you manage investment decisions, or do you prefer a simplified structure?
3. Third question: How does your withdrawal timeline align with the age 59½ IRA restriction?
4. Fourth question: What’s your state’s creditor protection landscape for IRAs?

If you proceed with a rollover, follow IRS rules precisely to ensure the transaction remains tax-neutral. One misstep could trigger unexpected tax liability.

Final recommendation: Retirement and tax strategy decisions are too important to navigate alone. Before initiating any pension rollover, consult a qualified financial advisor who understands your complete picture—income, risk tolerance, state regulations, and long-term goals. The cost of professional guidance is minimal compared to the potential cost of getting it wrong.