Can I roll-over most of my pension plan to an IRA and keep a portion?

by Timothy C. Hilbert, CPA | Jan 10, 2018
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I have $88,000 in a pension plan with a previous employer. I am 54 years old. I need $10,000 to pay off credit card debt, but I believe my pension plan will not allow a loan. Can I roll-over most of it to an IRA or Roth IRA, but keep $10,000? What would the penalty be on the $10,000? Is it 20 percent tax plus an early withdrawal penalty?

The inquiry describes the assets as part of a previous employer’s pension plan. The first step is to assess whether the previous employer plan provides for a lump sum distribution. Most do, but if the plan is a defined benefit plan, the plan may not provide for a lump sum. So, the distribution provisions of the previous employer’s plan will dictate whether a lump sum payment may be received.

If a lump sum distribution is available, the money can be rolled over. If it is rolled over to a regular IRA account, the rollover is not taxable. If the rollover is made to a Roth IRA, the recipient will pay income tax at his or her rate on the year’s tax return for the full rollover to the Roth account (conversion from a tax deferred account to Roth account always triggers tax at the date of transfer to the Roth account).

If a rollover is available, is made to a regular IRA, and then $10,000 is withdrawn (or retained), a taxpayer under the age of 59 ½ pays tax at his or her ordinary income tax rate (not necessarily 20 percent, as the rate could be lower or higher) for the year plus a 10 percent penalty on early withdrawal.

If the money is able to be rolled over, and is rolled over to a Roth IRA account, the income tax, as noted above, is paid on the full distribution to the Roth IRA account. A further withdrawal of $10,000 from the Roth account is not taxed a second time because the tax has already been paid because of the rollover to the Roth IRA. But if money is pulled out before age 59 ½, it is subject to the 10 percent penalty.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Timothy C. Hilbert, CPA, is a director of audit and accounting and professional services industry group leader with Kreischer Miller in Horsham, Pa.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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