What is a Defined Benefit Pension?
A defined benefit pension is the traditional retirement that most people think of when talking about retirement. It is the type that guarantees employees who stay with the company a lifetime income stream during retirement.
Are You Eligible?
According to the Department of Labor, an employer may require employees to have five years of service to become 100% vested in employer-funded benefits. Employers may also choose to offer a graduated vesting schedule. With this schedule, the vesting percentage will be 20% after three years, 40% after four years, 60% after five years, 80% after six years, and fully vested after seven years of service. Employers are free to provide more generous plans than this one as long as they adhere to these minimums.
Retirement Options When Leaving a Job
You typically have some options when leaving a job that comes with a defined benefit pension. You can choose to take the money as a lump sum now or take a promise of regular payments in the future, also known as annuitization. You might even be able to get a mix of both.
What to Do with Your Lump Sum Pension Amount?
If you decide to take the lump sum, consider rolling the money directly from your pension into an Individual Retirement Account (IRA) to avoid taxes. If the company writes you a check, you have 60 days to transfer the money into a tax-protected account before taxes are applied to the cash.
Unless you really need the money, it is generally best to avoid spending the lump sum before retirement. Not only do you miss out on long-term investment growth, but you will also have to pay taxes on the cash plus a 10% early withdrawal penalty. If you have significant assets in your plan, you might face a hefty tax bill.
The money can be invested in an Individual Retirement Account in any way you choose. You can even purchase an annuity within the account to secure some of that guaranteed income for yourself.
Some retirement plan sponsors, including Vanguard and Fidelity Investments, offer online tools and advice to help employees make the decision between annuitization and a lump sum. It’s worth experimenting with some before making a decision. You can also reach out to plan sponsors for advice based on your individual circumstances and goals.
The information contained in this article is not legal advice and does not substitute for such advice. State and federal laws change frequently, and the information provided in this article may not reflect your state laws or recent legal changes.
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Sources:
– U.S. Department of Labor
– Pension Benefit Guaranty Corporation
– Internal Revenue Service
Source: https://www.thebalancemoney.com/what-happens-to-my-pension-when-i-leave-a-job-2063411
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