There are two types of pension plans, defined benefit plans and defined contribution plans. A cash balance pension is a defined benefit plan, but has many of the elements of a defined contribution plan. You don't add any of your personal money or make investment decisions, but instead of taking payments, you have the option of taking a lump sum settlement, which you can roll into a Roth or traditional IRA.
Leaving the Company
If you leave the company that offers a cash balance pension after you work the required number of years for vesting, you have the option of taking the funds. Since it's a qualified pension, you'd normally roll the money into a rollover IRA, either traditional or Roth
Penalty for Removing the Funds
If you take the funds from the company and put the money in your personal account that is not a Roth or traditional IRA, you'll have to pay a 10 percent penalty and income tax on the money. If you're younger than 55 -- the minimum age to withdraw pension money without a penalty after separating from service -- you avoid the 10 percent penalty if you roll it directly into a Roth IRA, but you do include the funds in your ordinary income and pay income taxes on them.
Income Restrictions Repealed
As of 2010, there are no longer income restrictions when you want to convert any qualified plan to a Roth. Before this time, your income could not exceed $100,000. You can also convert if you're married filing separately, which is another restriction that prevented conversion of qualified retirement plans into a Roth.
Rollover vs. Transfer
If you decide you simply want your HR department to send you a check and you'll convert the funds to a Roth within 60 days, you might want to rethink your decision. The government requires your plan administrator to withhold 20 percent of the money for taxes if you receive the check. You'll have to pay a penalty on those funds, since you did not convert them, unless you replace them with your own money. A better way is to establish a Roth account is to sign paperwork that allows for a custodian-to-custodian transfer. You'll still owe tax, but won't have the additional cost of penalties.
- United States Department of Labor: FAQs About Cash Balance Pension Plans
- CNNMoney; Ultimate Guide to Retirement; What Is a Cash Balance Plan?
- Bankrate.com; 7 steps to a 2010 Roth IRA conversion Read more: 7 Steps to a 2010 Roth IRA Conversion; Amy E. Buttell
- IRS.gov: Retirement Plans FAQs Regarding IRAs
- Charles Schwab; 2010 Roth Conversion: Look Before You Leap; Rande Spiegelman CPA, CFP; December 2009
- Internal Revenue Service. "Traditional and Roth IRAs." Accessed April 20, 2020.
- Internal Revenue Service. "Topic No. 451 Individual Retirement Arrangements (IRAs)." Accessed April 20, 2020.
- Internal Revenue Service. "Income ranges for determining IRA eligibility change for 2021." Accessed November 1, 2020.
- Internal Revenue Service. "IRA FAQs - Contributions." Accessed April 20, 2020.
- Internal Revenue Service. “Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs).” Accessed April 20, 2020.
- Internal Revenue Service. "Rollover Chart." Accessed April 20, 2020.
- Internal Revenue Service. "Rollovers of Retirement Plan and IRA Distributions." Accessed April 20, 2020.