When you leave your job, you can move funds from your pension plan to the pension operated by your new employer. Pension plans contain tax-sheltered money and you must re-deposit the money into your new plan within 60 days to avoid being taxed on it. You have to earn the right to own your employer's contributions by completing a number of years of service. Under federal tax rules, it can take up to seven years for your employer's contributions to become vested, and you lose non-vested money when you leave your job.
Enroll in the pension plan sponsored by your new employer. Some firms do not allow you to enroll in a pension until your have completed at least one year of service, so you may have to leave your money in your former employer's plan until then. Decide how much you want to contribute to the new plan, but keep in mind that annual contribution limits on the new plan have no impact on your ability to roll funds over from your old pension plan.
Contact the human resources department or the custodian of your former employer's pension plan. Ask a representative how much money you currently have in the plan and whether those funds are fully vested. In defined contribution plans such as 401(k)s, employer contributions become vested at a rate of 20 percent per year once you have completed two years of service. In defined benefit plans such as annuities, vesting begins after you have completed three years of service, and funds become vested at a rate of 20 percent per year.
Provide your former employer with the name, address and contact information of the custodian of your new employer's pension plan. Instruct the representative to liquidate your pension plan and send the proceeds to your new pension plan provider. If you conduct such a trustee-to-trustee transfer and do not take possession of the funds, then you do not have to worry about the 60-day rollover window or tax complications.
Contact your new employer's pension plan custodian and check whether the pension proceeds were rolled over as instructed. It can can take several weeks for a rollover to occur, and the final rollover amount may differ from the account value on the day you made your request since securities prices fluctuate throughout the day. Your former employer and your new employer should provide you with confirmation that the transfer occurred. Keep these receipts in case any tax issues arise related to the rollover.
- You can complete the rollover yourself if you ask your former employer to write a check to you made payable to your new pension plan custodian. The payee line must also feature the letters FBO followed by your full legal name. Investment firms use the acronym FBO to signify that the funds as for the benefit of a particular individual rather than the investment firm.
- If you take possession of the funds, your former employer must withhold 20 percent of the distribution to cover federal taxes. You have to use other funds to replenish the pension proceeds when you deposit the money into your new employer's plan. When you file your taxes, the IRS credits you back the taxes that were withheld. If you do not complete the rollover within the 60-day period, then you have to pay the taxes. You will also pay a 10 percent tax penalty if you are younger than 59 1/2.
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