Can I put a 401(k) into my pension before I start taking payouts?
Can I rollover a 401(k) into my pension?
Pensions, (defined benefit plans) and 401(k)s (defined contribution plans) are usually kept apart. However, there are a few cases where those dollars can be combined. It is more common for employers to allow lump sum distributions from pension plans that can be rolled over into an IRA, as opposed to allowing contributions from outside sources like a 401(k).
The one exception that I am aware of is when a pension plan allows employees to "buy years" into the pension system in order for the employee to increase their pension benefit. I have seen this available mostly in public school retirement systems. Be aware that if you can deposit a lump sum into a pension system, it is unlikely you will have any access to those dollars again. So, make sure you are prepared to part with the balance. Also, make sure it is in your best interest by comparing the monthly payment you could get from your 401(k) money, versus the increase in monthly amount from your pension.
Every pension and 401(k) has it's own unique plan design. Consult with the plan administrator to be sure of your options.
Hope that helps, and best wishes on your retirement.
Wyatt A. Moerdyk, AIF®
No, you cannot roll your traditional 401(k) or IRA into your pension. However, if you elect to take a lump sum distribution from your pension, you could roll it into a IRA rollover account (IRRA). Both your traditional 401(k) and pension are pre-tax funded and can be commingled because any of your IRRA distributions will be taxed as ordinary income.
PENSION- You need to carefully weigh all your options before taking a lump sum distribution from your pension and rolling over your 401(k). The annuitized payment (from your pension paid to you monthly) should be added to monthly fixed income bucket. This bucket should be measured against your "needs" (expense) bucket (i.e. medical, housing, transportation, food budget). Many retirees find it comforting to have these types of expenses covered entirely by fixed payments, typically from a combination of pension, Social Security, and other types of annuitized payments.
401(k- Rolling over a 401(k) may increase your investment expenses depending on what type of IRA rollover account you open (i.e. self-directed IRA, investment advisor, annuity, etc.). You need to prudently determine if it’s less expensive to remain in your current 401(k) plan or any alternative outside the company sponsored plan. There are always tradeoffs and it may be helpful to speak with a financial professional that can help you examine your total financial picture and provide you with the proper guidance for your specific situation.
The correct answer is maybe. Most defined benefit plans (pension plans) don't allow rollovers into their plan primarily due to the more complex recordkeeping. But not to worry, you can always take the lump-sum from your 401(k) and have it annuitized by an insurance company. That's what they do and they love it. Just make sure you get some competitive bids. In fact, IF your pension plan allows you to roll the assets into an IRA Rollover, you should see what that lump-sum would be and then get some competitive bids on the lump-sum by a few different insurance carries letting them know it is a competitive bid. Don't just assume your pension plan is giving you the best deal. You must, however, do this before you begin taking payments because once you do this, your decision is irrevocable.
The other thing to take into consideration is that once you exchange the lump-sum asset for an income stream, that is it. And if we experience high inflation, your payments will seem smaller and smaller. Thus, you have given up control for what seems to be certainty, but that could be an illusion.
Many times, what I suggest to people is to figure out what they need as a minimum monthly income and then factor in a buffer, say 10% or even 15%. Annuitize enough of the lump-sum to take care of that, then do an IRA Rollover for the rest that either you can manage or have a professional manage. This will also help to reduce your taxes because the entire monthly income stream is taxable as income. This will reduce your income stream that is unnecessary.
Another reason is that once you have given up the lump-sum for an income stream, it is gone. You no longer own the lump-sum, so there is nothing left to pass on to your heirs if that is an issue. If you die prematurely, you lose (in addition to dying) and the entire lump-sum is gone. The only way to "win" when annuitizing is by outliving your life expectancy by 3-4 years. This is because the insurance company or entity paying the annuity must build in a safety net and profit.
I am not saying that the monthly income stream certainty is bad, just don't go overboard. Get the monthly income you need to live comfortably and keep the remaining lump-sum for flexibility. You can always take out "extra" anytime you want for emergencies, travel, etc., and when you turn 70 1/2, you will have to take out Minimum Required Distributions (MRDs) based on you life expectancy anyway. So at 70 1/2, you will have an additional, smaller "pension" whether you like it (or need it) or not.
I took the liberty of being quite direct, but wanted you to understand all of the variables at work. And each plan is different and they are not standardized like IRAs. So be sure you understand all of your choices. Can you do an entire or partial rollover into an IRA? What are the monthly payments and can you get a better deal elsewhere? Do you need the entire amount as a payout or is a portion enough? This is another reason I like doing either a full or partial DIRECT rollover into an IRA and go from there. It is more flexible and has more options.
I hope this helps and best of luck, Dan Stewart CFA®