Do You Have a Cash Balance Pension? Read Mike Palmer's Column in Kiplinger

How to Make the Most of a Cash Balance Pension

Lots of Baby Boomers have cash balance pension plans. As you near retirement its important to know your options. Mike Palmer's May 2024 column in Kiplinger Personal Finance outlines important considerations when making a choice about what to do with cash balance pension plans. Read Mike's Kiplinger column here: Got a Cash Balance Pension? Understand Your Options

The Basics of Cash Balance Pension Plans

Unlike traditional defined benefit pensions that provide a specific monthly benefit upon retirement, a cash balance pension maintains a hypothetical account balance. This balance grows based on company contributions and interest credits. Unlike a 401(k), employees cannot select their investment options; instead, the company determines the plan’s crediting rate, often set annually. Upon retirement or separation from service, employees typically have several distribution options.

Lump Sum Payment in Cash

Taking a lump sum payment from a cash balance pension can be tempting, but it’s important to remember that the entire amount is taxed as ordinary income, which can be very costly. Carefully weighing the tax implications of a lump sum distribution is crucial.

IRA Rollover

Participants can roll over their cash balance pension to an IRA. A direct rollover to a qualified retirement account is not taxable, but any withdrawals taken later will be taxed. An IRA rollover offers significant advantages: greater investment options and more flexible income tax planning.However, some companies don’t allow a rollover until the participant reaches a specified age, especially if they leave before retirement. Additionally, employers may require those with small cash balance pension benefits (under $10,000) to exit the plan, either as a lump sum or through an IRA rollover, upon separating from service.

Annuity Payments

Converting the cash balance pension into a series of annuity payments is another option. Annuities provide a steady income stream over a specified period, offering a predictable source of retirement income. Retirees should compare different annuity providers and payment options to find the best arrangement for their financial needs and goals.

Participants can also choose a combination of these options. For instance, a participant might decide to take annuity payments for 50% of their cash balance pension and perform an IRA rollover with the other 50%.

We recommend consulting with a Certified Financial Planner before making any decisions regarding cash balance pension benefits. Maximizing the benefits of your cash balance pension plan can significantly enhance financial security during retirement, ensuring that your retirement is worry-free.