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!