Cash-balance plans have gained popularity as savings and retirement instruments, providing a stable alternative in a volatile market. However, what happens if you withdraw money from your cash-balance plan before retirement? This question is not as straightforward as it appears, given the myriad rules and guidelines that regulate these plans.
Understanding how cash balance plans work is a prerequisite to deciphering the complexities of early withdrawal. A cash balance plan is a defined benefit plan that functions somewhat like a 401(k), but with substantial differences. While employers are responsible for both funding the plan and managing the investments, it's the employees who bear the risk in a 401(k). A cash balance plan, on the other hand, assures a certain payout on retirement, regardless of market performance.
However, despite these advantages, there may be times when early withdrawal seems like an attractive or necessary option. In general, many cash balance plans don't permit partial withdrawals, which means you can only withdraw your entire vested amount once you've separated from your employer's service.
Opting for an early withdrawal might seem like a plausible solution, but it comes with its share of penalties. For instance, if you're below 59 ½ years old, you would have to pay income tax on the withdrawn amount along with a 10% penalty from the Internal Revenue Service (IRS). There is an exception if you separated from service after turning 55, aligning these rules with those of 401(k)s and other qualified plans.
Given these stipulations, many financial experts, like Taylor Schulte, founder of Define Financial and host of the "Stay Wealthy Retirement Show" podcast, suggest that rolling over the assets into a personal IRA could be a wiser choice. This strategy allows you to bypass current taxation and offers the flexibility to make partial withdrawals when necessary. Nonetheless, note that withdrawn amounts could still be subject to income taxes and the 10% penalty.
If you're still employed and have not separated from service, you may consider taking a loan based on your vested amount. However, many cash balance plans do not provide such loan provisions in their documents. More often than not, you won't be able to access these funds while you're under 59 ½ years old and still employed with the plan sponsor.
Therefore, the reality remains that withdrawing from a cash-balance plan before retirement can have substantial financial implications. Given the current uncertain market and the ongoing volatility in sectors like Big Tech, it is crucial to thoroughly analyze your financial strategy. Your retirement funds should ideally remain untouched to accrue their full benefits.
To sum up, though cash balance plans provide a reliable retirement saving option, they come with stringent withdrawal conditions. Early withdrawal, apart from eroding your retirement corpus, also invites penalties and taxes. Consider rolling over your balance into an IRA if separation from service occurs. Always remember, retirement funds serve as a safety net for your future. Using them prematurely may expose you to financial risks that could impact your financial health in your twilight years. Consult with a professional financial advisor to make informed decisions about your retirement planning journey.
Summary:
In general, this won’t even be an option for many. Cash balance plans do not permit partial withdrawals. If you have separated from service at the employer, you can take your entire vested amount with you.
You can cash out your balance and pay income taxes on it, as well as a 10% IRS penalty if you’re younger than 59 ½. This penalty may also be avoided if you separated a from service after age 55; these rules are the same for 401(k)s and other qualified plans.
The smarter thing to do would probably be to roll the assets into a personal IRA. This avoids current taxation on the money and gives you the freedom to make partial withdrawals if you would like to, even though income taxes and the 10% penalty may apply to the withdrawn amount.
If you have not separated from service, you might be able to take a loan out of the plan based on your vested amount, but many cash balance plans do not have loan provisions in the plan document. The most likely scenario is that you will not be able to access these funds while employed with the plan sponsor and younger than 59 ½.
What Happens If I Withdraw Money From my Cash-Balance Plan After I Retire?
Can I Start Collecting My Social Security Benefits If I’m Still Working?