A cash balance pension plan is a unique kind of retirement savings account that provides an option for lifetime annuity payments. Unlike a traditional defined-benefit plan, the cash balance pension plan (CBP) functions similarly to a defined-contribution plan. It is individually maintained, meaning changes in the participant's portfolio value do not influence the account balance guaranteed by the employer.

In the world of retirement savings accounts, a CBP has a distinct position due to this nuanced nature. This financial instrument brings together aspects of both defined-contribution and defined-benefit plans, creating a hybrid system that offers certain benefits. The most notable of these is that the employer bears the investment risk, ensuring the employee receives the promised amount regardless of market fluctuations.

Cash Withdrawals from Cash Balance Pension Plans

Withdrawal from cash-balance pension plans, contrary to some beliefs, is not as straightforward as it might initially appear. It's not typical for these plans to allow for early withdrawals. As a rule of thumb, unless it is for rolling over assets to a new employer's plan or a personal Individual Retirement Account (IRA), you can't usually withdraw money from a CBP before retirement.

This restriction underscores the inherent purpose of a cash balance pension plan: it is designed for long-term savings towards retirement. If, however, the funds are moved to another account, they could potentially be accessible, but a 10% Internal Revenue Service (IRS) penalty applies if you're under 59 ½.

Loans and Cash-Balance Pension Plans

While cash withdrawals might be tricky, loans from a cash balance plan are another area that offers a glimmer of flexibility. These may be permissible if they comply with the same regulations as 401(k) loans and if the IRS and the Department of Labor (DOL) permit you to use your vested amount in your hypothetical account as sufficient collateral.

However, this potential avenue isn't always available. The availability of loan provisions largely depends on whether your plan sponsor or administrator included them in the plan document. If they didn't, this option is off the table. In such cases, you would have to wait until retirement to take a lump-sum distribution or an income stream, such as a traditional pension or annuity.

What Happens to Your Cash Balance Pension When You Leave Your Job?

So, what happens if you quit your job? Your cash balance pension is portable, which means you can carry the vested portion with you when you leave your job. You can then roll it over into another retirement account. This flexibility sets the CBP apart, providing a cushion for employees who switch careers or employers.

While cash balance pension plans may seem rigid regarding early withdrawals, their structure provides stability and a guaranteed return. They offer the potential for loans under certain conditions, and they provide portability, making them an attractive choice for many employees. However, it is essential to be aware of the IRS penalties for early withdrawals and to seek professional advice if considering accessing these funds before retirement.

Summary
It’s not likely that a cash-balance plan will allow for early withdrawals. Generally speaking, you can’t withdraw money from a Cash-Balance Plan before you retire, unless it is to roll over assets to a new employer’s plan or a personal IRA.

Once the money is in another account, you could potentially have full access to it, minus the 10% IRS penalty if you’re under 59 ½. Loans from a cash balance plan may be permitted if they abide by the same rules as 401(k) loans — and if the IRS and the DOL will allow you to consider your vested amount in your hypothetical account as adequate collateral.

Your plan sponsor or administrator may not have put loan provisions into the plan document, however, so this may not be an option. Otherwise, you’ll have to wait until retirement to take either a lump-sum distribution, which can be rolled into an IRA to avoid taxation on the entire amount at once, or an income stream like a traditional pension or annuity.

What Happens If I Withdraw Money From My Cash-Balance Plan Before I Retire?
What Happens If I Withdraw Money From my Cash-Balance Plan After I Retire?