Personal Finance

How to Remove Money From a Cash Balance Pension Plan

A cash balance pension plan can be an important retirement savings tool. A cash balance pension plan is a defined-benefit plan, which means the recipient's benefit is based on predetermined factors, as opposed to how well the plan's investments perform.

With a cash balance pension plan, your account is credited with a set percentage of your salary each year, plus a preset interest rate that's applied to your account's balance. Every year, you should receive a statement showing how much your account is worth.

Withdrawing funds from a cash balance pension plan

Once you're eligible for benefits under your cash balance pension plan, you'll need to decide how to withdraw that money. Though some cash balance plans offer only lump-sum payments, many let you choose between a lump-sum payment and a monthly payout, or annuity. With a lump-sum payment, you'll receive the entire balance held in your account at once. With an annuity, you'll receive your money in monthly installments.

There are advantages and drawbacks to each option. The benefit of taking a lump-sum payment is that you'll get all the money up front, and you're then free to use or reinvest it. On the other hand, if you take a lump-sum payment, you run the risk of blowing through your balance too quickly and not having enough money down the line.

The benefit of monthly or annuity payments is that they give you a steady stream of income over time. However, it also means missing out on the opportunity to invest that money up front and generate a return.

Removing money from a cash balance pension plan before retirement

Generally, you need to wait until you reach "retirement age," which for 2016 is 59-1/2, to start removing money from a cash balance pension plan. However, unlike traditional pension plans, cash balance pension plans are portable. This means that if you leave your job, you can take the vested portion of your plan with you and roll it into an IRA. In this regard, cash balance pension plans are similar to 401(k) plans. Once you've rolled your balance into an IRA, you can begin taking withdrawals without penalty once you reach 59-1/2. However, if you remove any of that money before you turn 59-1/2, you'll be subject to takes on the amount withdrawn, plus a 10% early withdrawal penalty.

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