How to Remove Money From a Cash Balance Pension Plan

In a typical cash balance pension plan, you will hold a hypothetical account within a trust account. That account has your set share of funds that consists of contributions and investment earnings. Employers usually credit each participant with compensation and interest credits. And they also assume all the investment risks.

Regardless of your job tenure, you are likely to get some benefit when you wish to leave. So, it helps to understand the process of cashing out a cash balance pension plan to avoid any taxation issues.

Are Cash Balance Plan Distributions Taxable?

A cash balance pension plan is one of the available tax-deferred retirement plans. And one of its significant advantages is that it allows large contributions.

As you grow older, you can contribute six figures as high as $200,000 ​or more from your pre-tax earnings, which greatly reduces your taxable income. However, that also means that you will be hit by taxes when cashing out a cash balance pension plan in the form of a lump sum or lifetime annuity. And what you pay could be significant.

Remove Money From a Cash Balance Pension Plan

Regardless of whether you get your cash balance pension plan funds as an annuity or lump sum, you need to decide what to do with it if you withdraw it before retiring.

You can either use the money for other projects or roll over the distributions to another retirement account, such as an IRA. The latter option may enable you to continue to defer the taxes for longer and avoid the ​10 percent​ early withdrawal penalty.

Below are the steps you can take when cashing out a cash balance plan:

  1. Find out whether you are eligible for the cash balance plan benefits. Even if you retire early, you have a right to the vested amount.
  2. Decide whether you want a lifetime annuity or lump sum.
  3. Determine what you want to do with the money. Do you want to save it in your bank account and use it for other projects? Or would you like to roll over the amount into a new retirement account? If you prefer to roll over the money, you need to have an IRA or open one first.
  4. Contact your plan’s administrator and request a withdrawal form. You may have the option of filling out online forms or relevant paperwork physically. Include all the necessary details, such as your official name and Social Security number. Be sure to state whether you want a lump sum or a lifetime annuity. Also, note the reason for the withdrawal if the question arises.
  5. If you want to roll over your benefit, you need to indicate that and provide your IRA provider and number. However, this option is primarily available if you withdraw a lump sum. Do bear in mind that you may need to fill in additional forms for the IRS and rollover purposes.
  6. If you want to use the money for other things, provide your bank details, such as your name and routing number. When you choose this option, determine what amount of taxes you need to pay on your benefits. That way, you will not be caught unaware.
  7. Submit your application and follow up until you get your funds.

How to Perform Rollovers

When doing rollovers, you need to be careful, so you don’t end up paying taxes early without meaning to. It will help if you perform a​ 60-day ​or direct rollover.

A direct rollover will ensure that your plan administrator sends your cash balance pension plan funds directly to an IRA, usually in a check. When your plan administrator does this, no taxes will be withheld from the money you are transferring.

However, you can also cash out your cash balance pension plan and deposit a portion of it in your IRA or any other compatible retirement plan. However, taxes will be withheld from these funds, and you will have to look elsewhere for additional funds to meet the deficit. But so long as you do that within ​60 days​, you will be fine.

What you do when cashing out a cash balance pension plan will determine whether your retirement savings help you out or not. If you don’t handle large amounts of money well, you can opt for an annuity rather than a lump sum. Alternatively, you can roll over your lump sum benefit and buy an annuity or make other investments with long-term benefits. It is up to you to determine what works for you best financially.