As of March 2022, only
You also likely know the value of staying long enough to reach the full vesting period. That's when you receive all the employer-provided benefits you've earned. Yet, after achieving that milestone, which varies by employer, what happens if you were to leave the company? Rest assured that vested benefits from a traditional pension are yours no matter what, whether you leave an employer by choice or not, and you'll have a few options for what to do with the money.
Leaving your pension with your old employer
The set payout is a strong reason to consider keeping your benefits with your existing retirement plan until you can claim them when you turn 65 (or the plan's normal retirement age, if earlier). Also, pension payments are protected against certain creditor claims, which may be important to you.
Your company may require that your pension stays put even if you leave the company before retiring, so start by reviewing your pension plan summary.
Cashing out your pension when you leave your company
If your plan allows it, you may be able to receive an early, lump-sum distribution, receiving the vested value of your pension in cash. However, you could face a tax hit for doing so.
The funds likely will be subject to federal income tax. Also, if you're younger than 59½, you typically face a 10% penalty on the entire withdrawal amount. An exception is if you leave your job in the year you turn 55 or after, in which case the penalty may be waived.
If you're exempt from the 10% penalty and are prepared for the tax consequences, you could consider a combination of a payout (for money in the short term) and rolling over your money to a retirement savings account (for money that could grow over time). But it's more common to consider a full rollover if sticking with your current employer's plan isn't an option.
Roll over your pension to an IRA or other tax-advantaged account
Pensions often don't provide enough money for retirement,
But having the ability to potentially grow your money in the market over a long period may help you reach your retirement goals more effectively. If your plan lets you receive a preretirement payment, you may be able to roll over a pension to a 401(k),
Considerations for a pension rollover to an IRA
While you'll have a few destinations on offer for rolling over your pension, it's common to see a
Penalty-free access to funds for certain reasons: You can take out money without incurring an
You still can maintain favorable tax treatment: A rollover into a traditional IRA isn't taxable. You pay taxes when you withdraw the money. With a pension rollover to a
You can own annuities in an IRA: Defined benefit plans typically distribute a pension in the form of an annuity paid over the employee's life (and potentially the life of their spouse). If you like the idea of including annuities in your portfolio,
You could outlive your money: Investing requires some degree of risk. Though strategies like
Seek help navigating the next steps for your pension
You have a lot to consider when you leave a job as a vested participant in a traditional pension. Since plan provisions about distributions vary, check your summary plan description for your options. Some plans even offer a graded vesting schedule in which you can become partially vested over time, which may spark different decisions.