You may have heard that a defined benefit plan can have a maximum amount of $3.5 million. But this is the amount that you can have at age 62.
In addition, the plan must have been open for at least 10 years in order to qualify for the $3.5 million. But this still assumes that you’re at least retirement age at the end of the 10 years.
But the question becomes: How much can you have in the plan by age and still be allowed to roll it over without penalties? We will answer this question in this post.
Some Background
Accumulating $3.5 million in a defined benefit plan is great. But many people will not have their plans until age 62 and may terminate early. When they terminate, they’ll roll the plan assets over into an IRA or 401(k) plan. If a plan is terminated before 10 years, then a proration occurs that adjusts the maximum amount you can have down accordingly.
Here’s a financial twist you might not expect. Defined benefit plans can be not just underfunded, but also overfunded. Overfunded plans can pose a major problem for many clients. When you terminate an overfunded plan, you could end up losing a staggering 90% of the overfunded balance in taxes and penalties.
The purpose of this post is to list out the maximum amounts that you can have in a defined benefit plan by age. Remember that the table is used as a guide. Funding ranges will vary largely due to prior contributions and investment returns, but this is a good starting point.
Using the table:
- The age on the left would be your age on December 31st of the year.
- The max balance listed on the right would be the maximum you can roll over assuming W2s or “deemed” compensation of at least $275,000.
- The maximum balance assumes at least 10 years of plan participation. If the participation was less than 10 years, maximum balances would be reduced.
- The amounts are estimates and the final maximum balance is calculated by our actuaries.
- You may have a balance higher than the table. However, it would potentially be subject to tax and penalties upon plan termination.
| Age | Maximum Balance |
|---|---|
| 32 | $799,490 |
| 33 | $839,990 |
| 34 | $882,560 |
| 35 | $927,300 |
| 36 | $974,310 |
| 37 | $1,023,750 |
| 38 | $1,075,720 |
| 39 | $1,130,320 |
| 40 | $1,187,730 |
| 41 | $1,248,070 |
| 42 | $1,311,510 |
| 43 | $1,378,200 |
| 44 | $1,448,310 |
| 45 | $1,522,010 |
| 46 | $1,599,480 |
| 47 | $1,680,940 |
| 48 | $1,766,580 |
| 49 | $1,856,600 |
| 50 | $1,951,260 |
| 51 | $2,050,770 |
| 52 | $2,155,400 |
| 53 | $2,265,390 |
| 54 | $2,381,050 |
| 55 | $2,502,650 |
| 56 | $2,630,500 |
| 57 | $2,764,920 |
| 58 | $2,906,250 |
| 59 | $3,054,830 |
| 60 | $3,211,070 |
| 61 | $3,375,340 |
| 62 | $3,548,070 |
How does overfunding impact my defined benefit plan?
An overfunded cash balance plan occurs when the plan’s assets, or the amount of money set aside for retirement benefits, exceed the present value of the expected retirement benefits. This situation can arise due to multiple factors, such as great investment performance, lower-than-expected IRS interest rates, and changes in life expectancy.
While an overfunded pension plan is often not the worst thing, it does not lead to increased participant benefits. It may present significant challenges such as tax implications and restrictions on withdrawing the excess funds.
