How do I roll over a pension to a 401(k) or IRA without paying taxes in 2025?

Most pension (defined benefit plan) distributions can be rolled over to a traditional IRA or another employer's 401(k) tax-free if done correctly.

Direct rollover (recommended): Request a direct rollover where the pension plan sends the funds directly to your IRA or 401(k) custodian. No taxes are withheld, and the entire amount transfers. This is reported on Form 1099-R with distribution code G (direct rollover).

Indirect rollover (60-day rollover): If you receive the distribution yourself, the plan must withhold 20% for federal taxes. You have 60 days to deposit the full distribution amount (including making up the 20% withheld from your own funds) into an IRA or 401(k). If you do not replace the 20%, that portion is treated as a taxable distribution and may be subject to the 10% early withdrawal penalty if you are under 59 1/2. You can only do one indirect rollover per 12-month period for IRAs.

What CAN be rolled over:

• Lump-sum pension distributions
• Periodic pension payments (before they begin as an annuity)
• After-tax contributions (to a Roth IRA, under certain rules)

What CANNOT be rolled over:

• Required Minimum Distributions (RMDs)
• Hardship distributions
• Payments spread over life expectancy or over 10+ years (annuity payments)
• Corrective distributions

Pension vs. IRA considerations: Some pensions offer guaranteed lifetime income, which an IRA cannot replicate without purchasing an annuity. Before rolling over, compare the pension's monthly benefit to what you could generate from the lump sum in an IRA. Consider factors like your health, life expectancy, other retirement income, and whether the pension has a cost-of-living adjustment (COLA).

Tax tip: If your pension includes after-tax contributions, you can roll the pre-tax portion to a traditional IRA and the after-tax portion to a Roth IRA. This avoids paying tax on money you already paid tax on.