What Happens to a Cash Balance Plan at Retirement? #1 Strategy

Cash balance plans are great retirement options. But what happens to a cash balance plan at retirement?

We get asked this question all the time. It is a rather simple answer because you have a lot of flexibility in retirement.

In this post, we will discuss your rollover and distribution options. Let’s walk-through and summarize what your options are at retirement.

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Cash balance plan options at retirement:

  • Terminate the plan and roll it over into an IRA or 401(k).
  • Annuitize the plan and take distributions out over your remaining term.
  • Keep the plan open and hold off on wihdrawals, subject to required minimum distributions.

What happens to cash balance plan at retirement?

When you retire from your job, you may be entitled to receive benefits from your cash balance plan. A cash balance plan is a type of defined benefit pension plan that is designed to provide retirement income to employees. It is funded by contributions from the employer and may also allow for employee contributions.

The specific benefits that you will receive from your cash balance plan at retirement will depend on the terms of the plan and any applicable laws and regulations. In general, cash balance plans provide a retirement benefit that is based on a formula that takes into account factors such as your salary and the length of your service with the employer. The benefit is usually expressed as a monthly payment and may be paid to you in the form of a lump sum or an annuity.

Distribution OptionsPitfalls
Rollover to IRADon’t forget about RMDs
Distribute to a 401(k)Conservative Investments
Start taking annual withdrawalsBe careful with overfunding
Freeze or terminate planBeneficiary options

When you reach retirement age and are ready to begin receiving benefits from your cash balance plan, you will typically need to make a decision about how you want to receive your benefits. You may have the option to receive a lump sum payment, which is a single payment that represents the balance of your account. Alternatively, you may be able to choose to receive your benefits as an annuity, which is a series of payments that are made over a period of time.

It’s important to note that the rules governing cash balance plans can be complex, and the specific options that are available to you at retirement will depend on the terms of your specific plan and any applicable laws and regulations. If you have questions about your cash balance plan or how to receive your benefits at retirement, it’s a good idea to consult with a financial professional or a qualified legal advisor. They can help you understand your options and assist you in making informed decisions about your retirement savings.

How do I terminate a cash balance plan?

There are many steps that an employer must follow to terminate a cash balance plan. A cash balance plan is a defined benefit pension plan that combines elements of traditional defined benefit plans with those of defined contribution plans, such as 401(k)s.

Here are the steps that an employer must follow to terminate a cash balance plan:

  1. Notify employees: The employer must notify all employees covered by the cash balance plan of their intention to terminate the plan. The notice must include information about the timing and details of the termination, as well as the options available to employees for their account balance.
  2. Transfer account balances: The employer must transfer the account balances of all employees covered by the plan to a new retirement plan or to individual retirement accounts (IRAs). The employer may transfer the account balances to a new defined benefit plan, a defined contribution plan, such as a 401(k), or individual IRAs.
  3. Terminate the plan: Once the account balances have been transferred, the employer must terminate the cash balance plan formally. This typically involves filing the appropriate paperwork with the IRS and other relevant regulatory agencies.
  4. Wind up the plan: The employer must wind up the cash balance plan by completing any remaining administrative tasks, such as preparing final actuarial reports and settling any outstanding liabilities.

Overall, terminating a cash balance plan is a complex process that requires careful planning and coordination. Employers need to work with a qualified professional to ensure that all steps are taken correctly and that the rights of employees are protected.

Do I need to take an annuity?

Realize that an annuity is defined as a stream of payments. But most people think of annuity from an insurance standpoint. But cash balance plans are different.

You can turn this into a technical insurance annuity and the cash balance since we consider an annuity to be a stream of payments over your remaining life.

What Happens to a Cash Balance Plan at Retirement

For example, you can take out $265,000 a year from age 62 through your mortality date if you have a max plan. This will technically be 78 or 80, depending on IRS mortality tables. You can usually find this information on the illustration.

So don’t be concerned about the use of the word annuity. We are not talking about insurance products at all. What happens to cash balance plan at retirement depends often on your tax situation.

In Summary

The good news is that you have plenty of options at retirement. But in general, most people will roll the funds over into an IRA. This is because administration fees are high, and taking a set amount out typically does not make sense.

Don’t think that you are locked into an annuity or a payment stream. While you certainly can elect this, most people will just do a rollover.

Whatever option you choose, just know that you have some flexibility. Discuss your situation with your CPA or tax professional so you understand what the tax ramifications will be.

Paul Sundin

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