Cash Balance Pension Plans: What to Know if Yours Is Being Terminated

From Fortune 500 companies to small businesses, cash balance pension plans are becoming increasingly popular. Because they are employer funded, they allow for a higher annual contribution than traditional 401(k) plans, and employer contributions are tax-deductibles. They also provide flexibility. If an employee leaves or their employer terminates the plan, the balance can be rolled over if the employee is vested.

If your cash balance pension plan is being terminated, it’s important to know all your options. Many of our high-earning clients, including those with billable hours or seeking diverse investment opportunities, need a plan tailored to their unique needs.

Distribution Options

When notified that your cash balance pension plan is being terminated, you need to decide how to receive your money. Do you want a taxable lump sum payment or a tax deferred rollover distribution?

Tax-Deferred Rollover Distribution
The tax-deferred rollover distribution may be the most beneficial option because it allows the retirement savings to continue growing. This approach preserves the full value of the balance by deferring paying taxes, in some cases by decades, when an early withdrawal happens or retirement.

For clients who choose a tax-deferred rollover distribution, they will have greater investment flexibility than with their previous cash balance plan. A financial expert can provide guidance on transferring the funds into a traditional IRA or another qualified retirement plan.

Taxable Lump Sum
For others, a taxable lump sum is an option because flexibility and immediate cash is the priority. However, it will be treated like ordinary income, and subject to federal taxes, and possibly state taxes.

For younger professionals, who expect big income growth in the future, may find this option less costly now than later in retirement. An important consideration is that people under the age of 59 ½ will face a 10 percent early withdrawal penalty.

For clients who choose the taxable lump sum, the funds can be directed towards a variety of opportunities, such as:

• Brokerage account investments
• Real estate or business ventures
• Paying down debt
• Rolling into an IRA

Your finances are personal, shaped by your career path, your family priorities, your risk tolerance, and the goals you are working toward. The right choice depends on how this decision fits into your broader financial picture today and what you want your money to accomplish for you in the years ahead.

Ben Hunter is the Managing Director/Head of Legal Specialty at Pinnacle’s Atlanta Riverwood office. He can be reached by email at Benjamin.Hunter@pnfp.com and by phone at 470.936.7592.

Visit PNFP.com/Legal to learn more.