How to think about pension choices when you leave a job

When you change employers, the decisions you make about your pension can permanently alter your retirement income and tax picture. Choices typically include leaving benefits in the old plan, transferring or rolling the balance to a new employer plan or IRA, taking a lump-sum payout, or cashing out. Each path affects taxes, fees, future income guarantees, and survivor benefits. This article gives a practical, up-to-date playbook (2025) to evaluate and act.

Types of employer pension plans and why it matters

  • Defined benefit plans (traditional pensions): promise a specific monthly benefit at retirement based on salary and service. Options may be an annuity for life or, when offered, a lump-sum buyout. These plans can include survivor benefits and early-retirement reductions.
  • Defined contribution plans (401(k), 403(b), profit-sharing): hold an account balance you and/or your employer funded. These are usually easier to roll into an IRA or a new employer plan.

Understanding which type you have is the first step because a defined benefit plan’s choices (annuity vs. lump sum) differ materially from a defined contribution account’s rollover options.

Common options explained (with pros and cons)

  1. Leave the pension with your former employer
  • Pros: Keeps plan guarantees (for many DB plans) and avoids immediate taxes or penalties.
  • Cons: Less control over investments and possible plan changes; if you’re not fully vested you could forfeit some benefits.
  • When to consider: You plan to retire at the same company’s plan formula or the monthly benefit/annuity is generous and survivorship is essential.
  1. Transfer or roll over to your new employer’s plan
  • Pros: Consolidates retirement savings; continues tax-deferred treatment.
  • Cons: New plan may have limited investment choices or higher fees; not all plans accept rollovers, and DB plans don’t always permit direct transfers.
  • Mechanics: Use a direct rollover (trustee-to-trustee transfer) to avoid mandatory withholding and to keep the tax deferral (IRS rollover rules) (IRS: Rollovers of Retirement Plan and IRA Distributions).
  1. Roll over to an IRA
  • Pros: Far more investment choices, control, and ability to convert to a Roth later if desired.
  • Cons: Moving from a DB plan to an IRA may eliminate lifetime annuity protections; IRAs have different creditor protection and distribution rules.
  • When to consider: You want more control or the new employer plan has poor options. See our primer on retirement account types for differences between IRAs and workplace plans (FinHelp: Retirement Account Types Explained).
  1. Take a lump-sum distribution or cash out
  • Pros: Immediate liquidity.
  • Cons: Lump sums are taxable (for pre-tax money), often subject to a 10% early withdrawal penalty if under 59½, and a forced-withholding of 20% for certain distributions if not rolled over directly. You may also lose decades of tax-deferred growth.
  • Caution: In many cases, cashing out is the costliest route for long-term retirement security.
  1. Special situations: annuity election, QDRO, and partial rollovers
  • Some DB plans offer an annuity with survivor options or a discounted lump-sum. Divorce splits of pension interest require a Qualified Domestic Relations Order (QDRO) for defined contribution plans (or special handling for DB plans).

Tax and timing rules you must know (2025)

  • Direct rollover vs. indirect rollover: A direct rollover (trustee-to-trustee) avoids mandatory 20% withholding and preserves tax deferral. An indirect rollover triggers a 60-day rule: you must redeposit funds within 60 days to avoid taxes and penalties (IRS rollovers guidance).
  • Early withdrawal penalty: Distributions before age 59½ may incur a 10% IRS early distribution penalty on taxable amounts unless an exception applies (e.g., separation from service at age 55 for some plans, or other IRS exceptions).
  • Vesting: Employer contributions may be subject to vesting schedules. If you leave before you’re vested, you could forfeit employer contributions and earnings.
  • Required Minimum Distributions (RMDs): For 2025, the RMD age is 73 for most retirees (SECURE 2.0 rules enacted in 2022) — plan rules and IRA rules differ, so coordinate timing if you hold accounts across vehicles.
  • After-tax contributions and basis: If your account has after-tax (Roth or non-Roth) components, different rollover rules and tax treatments apply. Keep good records of basis to avoid double taxation.

(Authoritative sources: IRS rollover rules and Q&A: https://www.irs.gov/retirement-plans/rollovers-of-retirement-plan-and-ira-distributions; general retirement guidance: https://www.irs.gov/retirement-plans)

A decision checklist: how I evaluate pension options in practice

In my practice I use a checklist to keep choices evidence-based. Use this when you’re assessing an offer or exit paperwork:

  • Confirm the plan type (DB vs DC) and ask for a written statement of benefits.
  • Check your vested percentage and ask how service credit is determined.
  • Ask whether the plan offers a lump sum, annuity, or both; request the actuarial equivalence statement for lump sums.
  • Get the plan’s fee schedule and investment options (if DC).
  • Confirm whether the new employer plan will accept a rollover and compare fees and investments.
  • Ask about survivor benefits, spousal consent requirements, and what happens if you die before distributions begin.
  • If you’re considering a rollover to an IRA, ask about creditor protections and whether you plan to convert to a Roth later.
  • Consult a tax pro for projected tax cost of a lump-sum distribution and any state tax considerations.

Practical step-by-step when you change jobs

  1. Request your plan exit packet and a written benefits statement immediately after resignation.
  2. Verify vesting and the options available (annuity, lump sum, rollover). If a lump-sum is offered, ask what assumptions underlie that amount.
  3. Decide your primary objective: protect guaranteed income, maximize growth, minimize taxes, or liquidity.
  4. If rolling over: arrange a trustee-to-trustee transfer (direct rollover) to a new plan or IRA to avoid withholding and keep tax deferral.
  5. If you take a distribution and want to redeposit: meet the 60-day rule and document everything (tax withholding can complicate recovery).
  6. Update beneficiary designations on any new accounts immediately.

Two short case studies

  • Client A (rollover to IRA): Sarah, a 45‑year-old who left a job after 10 years, had a modest DB lump-sum offer and no strong need for guaranteed lifetime income. We rolled her into a traditional IRA to centralize investments and later executed a partial Roth conversion when her taxable income was lower. That preserved tax deferral while giving flexibility.

  • Client B (kept pension): John, age 62, had a generous defined benefit annuity with a survivor option. He kept his pension with his former employer because the guaranteed lifetime income beat projected returns after fees and taxes, and it simplified his retirement income planning.

These examples highlight that the “best” option is situation-specific.

Special planning considerations

  • Coordination with Social Security: If you expect a large guaranteed pension, delaying Social Security may make sense; coordinate expected income streams to manage tax brackets.
  • Sequence of withdrawals and Roth conversions: If you roll to an IRA, think about future withdrawal sequencing and whether Roth conversions fit your long-term tax plan. See our article on Roth vs. Traditional IRAs for conversion tradeoffs (FinHelp: Roth vs. Traditional IRAs: Making the Right Choice).
  • Consolidation vs. diversification: Consolidating accounts simplifies management but can increase concentration risk. Balance simplicity with investment diversification.

Frequently asked practical questions

  • Can I roll a DB pension into an IRA? Often yes if the plan offers a lump-sum distribution; if the plan requires annuitization the rollover option may not be available. Always request the plan’s distribution options in writing.
  • Will I owe tax if I roll to another qualified plan? A direct rollover keeps funds tax-deferred; an indirect rollover or cash-out can cause immediate taxable income.
  • What if my plan withholds 20%? That generally happens for certain lump-sum payouts that you don’t directly roll over. You can reclaim withheld amounts when you file taxes only if you completed a timely rollover covering the gross distribution.

(See IRS guidance on rollovers and withholding: https://www.irs.gov/retirement-plans/rollovers-of-retirement-plan-and-ira-distributions)

Resources and internal reading

Final recommendations

  • Don’t make a rushed decision. Ask for written plan terms, run the numbers, and get a tax estimate for any lump-sum distribution.
  • Prefer direct rollovers when you want to preserve tax deferral. Cashing out is usually the most expensive path.
  • Use professional help for complex cases: divorce (QDROs), large lump sums, or when lifetime annuity valuations are unclear. In my practice I routinely run a projected income comparison (annuity vs. rollover) to measure which option better secures retirement goals.

Professional disclaimer: This article is educational and does not replace personalized financial, legal, or tax advice. Rules and thresholds can vary by plan and state; consult your plan administrator and a qualified advisor for decisions tailored to your situation.

Authoritative sources: