What can be rolled over
The IRS rollover chart treats defined benefit pension plans as qualified plans, so an eligible lump-sum distribution can be rolled to a traditional IRA (IRS rollover chart). But a distribution that is one of a series of substantially equal payments, such as a monthly pension for life, is not an eligible rollover distribution, and neither is a required minimum distribution (IRS: Rollovers of retirement plan and IRA distributions). In plain terms: you can roll a lump sum, but you cannot roll monthly pension checks.
Two paths side by side
| Keep the monthly pension | Take the lump sum and roll it | |
|---|---|---|
| What you receive | Monthly payments set by the plan formula and the survivor option you choose | A lump sum you control and can turn into income with a product you choose |
| Can you change your mind? | Elections are usually final once payments start; ask the plan | A completed direct rollover cannot be undone; an annuity has a free-look period, then surrender charges |
| Taxes | Monthly payments are generally taxed as income when received | A direct rollover to a traditional IRA is generally not taxed until withdrawn |
| If you die first | Depends on the survivor option you elected | Depends on your beneficiary designation and the contract |
The traps
- Withholding. A taxable lump sum paid to you is subject to mandatory withholding, generally 20%, and you must replace it from other funds to roll over the full amount (IRS Topic 413). Choose a direct rollover.
- An irreversible choice. Once payments begin or the money is rolled, you may not be able to go back. Ask in writing whether the election can be changed and until when.
- Comparing unlike things. A pension’s monthly amount and an annuity’s payout are not the same kind of promise. Ask for the plan’s lump-sum figure and the monthly figure side by side, and for an annuity quote with all fees and surrender charges stated.
- Someone else’s sales pitch. Be cautious of anyone who says you will “get more” without showing the comparison on paper.
Where an annuity fits
Some retirees use an annuity inside the IRA to rebuild a stream of payments after taking a lump sum. Whether that is better than the pension depends on the survivor benefit, the interest-rate environment, the carrier and your health, and an annuity’s guarantees depend on the issuing company’s claims-paying ability. See single-premium annuities and every rollover account at a glance.
Weighing a pension buyout? Get the comparison on paper.
Request a no-obligation Retirement Income Review. We explain your options in plain English, with no pressure and no promises of returns.
Request my Retirement Income ReviewQuestions to ask the pension plan
- What is the lump-sum amount, and how is it calculated? Does it change with the date I elect?
- What is the monthly amount, with and without a survivor benefit?
- Does my spouse have to consent to a lump sum?
- Can the lump sum be sent as a direct rollover, and by what date must I elect?
- Can I change my election after I make it?
Related reading
See your 401(k) options, rolling over a TSP and how annuities are taxed.
Where to check these rules
Every rule on this page comes from the IRS. Read the source for your situation:
- IRS rollover chart (PDF)
- IRS: Rollovers of retirement plan and IRA distributions
- IRS Topic 413: Rollovers from retirement plans
Availability and rules vary by state
Life insurance and annuity products, rates, riders and consumer protections differ by state, and a given product may not be available in every state. Honorbrook is licensed in the 11 states below; which products we can offer you depends on what carriers sell in your state. Each state’s insurance regulator can verify an agent’s license and answer consumer questions.
- Virginia: Virginia Bureau of Insurance
- Maryland: Maryland Insurance Administration
- North Carolina: North Carolina Department of Insurance
- South Carolina: South Carolina Department of Insurance
- Georgia: Georgia Office of Insurance and Safety Fire Commissioner
- Alabama: Alabama Department of Insurance
- Louisiana: Louisiana Department of Insurance
- Texas: Texas Department of Insurance
- Michigan: Michigan Department of Insurance and Financial Services
- Indiana: Indiana Department of Insurance
- West Virginia: West Virginia Offices of the Insurance Commissioner
This article is general information and is not tax, legal, investment or financial advice. Annuity guarantees depend on the issuing company’s claims-paying ability, and surrender charges and fees may apply. A licensed agent can help with your situation.