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How to Cash Out Pension Plan Early

March 11, 2017 9 Comments

The Pension Plan is a tax qualified retirement plan designed to provide you with additional income when you retire. Most of the time you don’t need to make any contributions and the money is funded solely by your employer. This cash-balance pension is kept in a safe interest bearing accounts. The interest credits on your pension balance might be based on the annual interest rate on 30-year U.S. Treasury bonds. Any distribution of benefit you receive from the Pension Plan is considered taxable income.

So can you cash out a pension early? Yes you can. The best way to avoid any penalty when you cash out your pension early is to roll your money into an IRA when you leave the company. But first, let’s talk about the penalty when you cash out your pension early.

Penalty for Cash Out Pension Plan Early

If you receive a lump sum distribution prior to reaching age 55, you may be required to pay an additional 10% Federal income tax. You can avoid paying the additional tax on a lump sum distribution by rolling over this distribution into an IRA, Roth IRA, or another eligible retirement plan, which is usually sponsored by another employer.

If you do make a rollover, you would defer paying taxes until you make a taxable withdrawal from the new plan. If you plan to roll over your benefits into an IRA, Roth IRA, or another plan, be sure to arrange for a direct rollover (the distribution should be payable to the new plan in the name of your own account, not to you personally) to avoid the 20% Federal withholding. If the check is made payable to you, 20% will be withheld, even if you roll over the funds.

How to You Receive Your Pension Benefit

You can receive your benefit if all of the following are satisfied:

  • You are vested;
  • You reach eligible retirement age; and
  • You retire from, or are no longer employed by your employer.

Your beneficiary will receive your benefit should you die before you reach retirement age. If you terminate employment (or die) mid-quarter, your account will receive contribution credits through your date of termination and interest credits through the end of the month before your (or your beneficiary’s) date of distribution.

Normal Retirement Age

Normal retirement age for the Pension Plan is 65. If you are actively employed, and you reach normal retirement age, you become fully vested in your benefit under the Pension Plan, regardless of your number of years of vesting service.

Early Retirement Age

You qualify for early retirement benefits under the Pension Plan if you are age 55 and have completed three years of vesting service (early retirement age). If you are vested and terminate before age 55, you cannot draw a benefit until you are at least 55 years of age. Your account will continue to earn interest credits until you begin receiving benefits from the Pension Plan.

If You Die Before Your Benefits Commence

Your beneficiary will receive a benefit equal to 100% of the value of your account balance if:

  • You die while you are an employee, or
  • You die after you have terminated your employment with or retired from your company and have a vested benefit, but before you have commenced your benefit.

If your beneficiary is your spouse, he/she will be paid in the form of a single life annuity unless he/she elects to receive the benefit in the form of a lump sum distribution. Your spousal beneficiary has the option of rolling over your death benefit to his or her own Eligible Retirement Plan

If your beneficiary is not your spouse, he/she will be paid in a single, lump sum distribution as soon as administratively feasible. Your nonspouse beneficiary has the option of rolling over your death benefit to an IRA, a Roth IRA, or an individual retirement annuity.

Forms of Payment

If you want to cash out pension early and receive your benefit before normal retirement age or as early as your early retirement age, you should request a distribution form from your company’s benefits center. Normally, there are three options available to you:

Lump Sum Distribution

With a lump sum distribution, you receive your entire vested benefit in a single payment. If you receive a lump sum distribution (if married, this requires your spouse’s consent), you may defer your tax liability by rolling over your account balance into an IRA or another eligible, tax-qualified plan (usually your new employer’s pension or 401(k) plan).

Single Life Annuity

A single life annuity provides a fixed monthly payment as long as you live. Upon your death, no further benefits are paid to you or your beneficiaries. The monthly annuity amount is computed at the time of retirement based on your account balance at the time of retirement and the current annuity conversion factor. The annuity factor is based on your age, the number of years you are expected to live, and the applicable interest rate.

Joint and Survivor Annuity

A joint and survivor annuity provides a fixed monthly payment as long as you live. After your death, 50% or 75% (your choice) of the benefit you were receiving is paid to your spouse for life. The monthly annuity amount paid during your lifetime is reduced to account for the continued payment to your spouse.

Final Thought

It’s your money, so you can cash out your pension plan early at any time. However, I would recommend to rollover to your  IRA, Roth IRA, or another eligible plan. Please keep in mind that, when you cash out your pension plan early, you have to pay ordinary income tax since any distribution of benefit you receive from the pension plan is considered taxable income in the year that you receive it. Good luck with your plan to cash out pension!

Related

Comments

  1. Robert Clark says

    August 29, 2017 at 8:56 am

    I have a pension I am receiving from Transamerica. I was just told by them that I cannot cash out with a lump sum… that once the pension is started monthly, there can be no change. Is there an alternative way I can affect a lump sum cash out>

  2. Bryan says

    March 16, 2019 at 9:34 am

    I want to know the same thing as the above comment. My mom needs memory care but with her pension she makes too much money to qualify for Medicaid and not enough money for private care.

  3. David says

    May 21, 2019 at 11:48 am

    I would like the same information

  4. Terry Lynn Bradford says

    July 9, 2019 at 8:52 am

    Same here.

  5. Sam Duran says

    November 4, 2019 at 3:53 pm

    Heartship server congestive heart failure receiving SSl disability needing lump sum pension cash out to stop a forucloser on my home local 953 operators and engineers please help asap

  6. Mel Winfrey says

    December 13, 2019 at 12:13 pm

    I want to withdraw half of my pension . Can I do that? Thank you

  7. Mr. UNICRON says

    December 13, 2019 at 11:50 pm

    Withdraw my money

  8. tyson allen says

    January 14, 2020 at 3:47 pm

    Looking to withdraw some of my pension early before 55 as I am vested? What do I need to do to start process? This is non 401K contributions but a company pension plan from a old company I worked at.

  9. Stacy Bosak says

    August 10, 2022 at 12:45 pm

    So I retired from Loma Linda on 6-3-07!…I have been trying to cash out my retirement due to a job injury!..This is so rediculous, I paid in!… I dont know how to get my benifits released to me!… No phone number to talk with someone!…
    About 4 years ago I talked with numerous individuals from the retirement plan and I gave them my address and they told me they would send me a link code to go online to cash it out!…Quess what? …I never received any corispondence!… I worked for Family Care.
    This has been so stressful!…My husband has cancer and I needed and still need the money for his bills!… If anyone has a retirement plan, I would cancel immediately!…Ive been trying to get this money out since 6-4-07!… This has caused me severe distress!… I need you to send me my information so I can get my money!…Its been 15 years of trying verbantly to obtain my money!… Im 58 years old!…Please be so kind to send me the information I need!… My address is 18388 South Tawny Ln in Peeples Valley Arizona 86332. My name is Stacy Bosak!… My phone number is (928) 800-1325!…Lets see how long you will make me wait this time.
    Also I cant find your number, its not listed.

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