Leaving a job - what to do with retirement plan balance

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Travis1
Posts: 51
Joined: Sun Jul 19, 2015 11:37 pm

Leaving a job - what to do with retirement plan balance

Post by Travis1 »

Good Morning,

My wife and I are both about to leave a place where we've been employed for 13 years. We've both contributed a solid chunk of money to the pension program, but one or more likely both of us may opt to take our contributions out of the pension. Our contributions have been before-tax.

Our options are as follows:
1. Leave the money in and collect a small pension later in life. I don't like this option personally as I'm not confident the pension won't take a haircut.
2. Receive a lump sum check with taxes deducted.
3. Receive a rollover - we use Vanguard so that is where it will head.

I wondered if anyone would suggest #2 for any reason. We don't and shouldn't need the money any time soon, so I imagine #3 is our best option.

I realize that I'm providing much less detail than people prefer on this forum, and that you may not be able to give me the best advice. But any thoughts would be appreciated.

Thank you in advance!
User avatar
Artful Dodger
Posts: 1195
Joined: Thu Oct 20, 2016 12:56 pm

Re: Leaving a job - what to do with retirement plan balance

Post by Artful Dodger »

I would do #3.

I recall my old company restated their pension plan once, and I was offered something similar. I don't think I gave it much thought, and I elected or maybe the default was your #2. I got a small check that was soon forgotten. It would have been better to leave the money with them or rolled over, not paid the taxes, and gotten the future tax deferred growth.

Especially in your circumstances with probably some significant accruals, go the rollover route.
dbr
Posts: 35878
Joined: Sun Mar 04, 2007 9:50 am

Re: Leaving a job - what to do with retirement plan balance

Post by dbr »

Hypothetically speaking it could happen that the tax on the lump sum plus tax on future investment gains would be less by enough to get the money and not pay tax on withdrawals of principal and gains in the future. A person would have to examine the situation in detail. This seems an unlikely scenario.
Chuckles960
Posts: 31
Joined: Thu May 13, 2021 12:09 pm

Re: Leaving a job - what to do with retirement plan balance

Post by Chuckles960 »

Travis1 wrote: Wed Jun 09, 2021 10:44 am I wondered if anyone would suggest #2 for any reason.
In essence the question is the same as "I wonder if there is any reason to NOT contribute to a tax-deferred account". If you don't need the money now, there is no reason. Tax deferral saves money because you are not 'double taxed'.
Last edited by Chuckles960 on Wed Jun 09, 2021 12:28 pm, edited 1 time in total.
User avatar
AllMostThere
Posts: 235
Joined: Sat Dec 31, 2016 2:04 pm

Re: Leaving a job - what to do with retirement plan balance

Post by AllMostThere »

Do you really want to be keeping track of these small pension amounts until full retirement age? I am advocate for cutting the strings from prior employer and moving the money. This will aid with future potential risk reduction should pension have future issues. I just recently did option 3 myself. Upon retirement from prior employer, I rolled over cash balance pension amount to my 401K (could have also done rollover to tIRA). Mostly, I wanted to ensure my pension could one day go to my beneficiaries upon my exit from this world many years from now. Additionally, as I am only 55 years old, I am highly confident that I can outperform any pension benefit by self managing this pension amount in my retirement account. Next step will be to cut 2nd employer string upon reaching 59.5 years by moving my 401K to my tIRA.
It is not about how much you make, it is about how much you keep and how well you invest it. - Author Unknown
rich126
Posts: 2739
Joined: Thu Mar 01, 2018 4:56 pm

Re: Leaving a job - what to do with retirement plan balance

Post by rich126 »

1. Leave the money in and collect a small pension later in life. I don't like this option personally as I'm not confident the pension won't take a haircut.
Is it possible for a pension to "take a haircut" for a person who has left the company? I think there are rules for the pension and it is what it is.

Now it is possible for pensions to change and get worse in the future that would harm anyone still working there. I'm referring to things such as freezing the plan so that additional work years or increasing salary levels no longer impact the pension you would get. Or a plan can go bankrupt and if your pension were to exceed the insured amount, your payout would be limited to that insured amount.

I'm be curious whether it is possible for someone who is guaranteed "x" dollars at age 65 and leaves a company to see there "x" dollars reduced. Is that legal?
backpacker61
Posts: 697
Joined: Wed May 20, 2020 6:36 am

Re: Leaving a job - what to do with retirement plan balance

Post by backpacker61 »

I would compare option 1 to an annuity you would get with the lump sum from option 3 at immediateannuities.com.
  • Do you have any other guaranteed sources of retirement income (SSDI?), and how much is the projected benefit relative to your necessary expenses?
  • Is the pension backed by PBGC or a state/local taxing authority?
  • Do you have other "lump sum" accounts that you will be managing for yourself in retirement, so that this pension would represent a worthwhile diversifier, and potential replacement for (currently low yielding) bonds?
I would only go with option 1 or option 3, unless the lump sum from option 2 is needed to keep from being foreclosed on (doesn't sound like it applies to you).
Last edited by backpacker61 on Wed Jun 09, 2021 12:54 pm, edited 2 times in total.
“Now shall I walk or shall I ride? | 'Ride,' Pleasure said; | 'Walk,' Joy replied.” | | ― W.H. Davies
oldfatguy
Posts: 997
Joined: Tue Feb 27, 2018 1:38 pm

Re: Leaving a job - what to do with retirement plan balance

Post by oldfatguy »

Travis1 wrote: Wed Jun 09, 2021 10:44 am
Our options are as follows:
1. Leave the money in and collect a small pension later in life. I don't like this option personally as I'm not confident the pension won't take a haircut.
2. Receive a lump sum check with taxes deducted.
3. Receive a rollover - we use Vanguard so that is where it will head.
It depends on the specifics of the plan.

Does the plan allow you to withdraw or rollover your contributions? (Since you are asking, I would assume yes, but have you checked?)
Are there any employer contributions? What happens to those if you withdraw your contributions?
If you leave the money in there, what happens to it? Does it grow? How will your benefit be calculated?
obgraham
Posts: 1321
Joined: Mon Jan 28, 2013 7:30 pm

Re: Leaving a job - what to do with retirement plan balance

Post by obgraham »

IMHO there are three best choices:
They are all #3.
Topic Author
Travis1
Posts: 51
Joined: Sun Jul 19, 2015 11:37 pm

Re: Leaving a job - what to do with retirement plan balance

Post by Travis1 »

Thank you all very much for your responses. I've pretty much decided based on them that #3 is what we will do. The point about allowing beneficiaries to eventually get what I've earned was a really good one, even if my benefit later in life is a bit smaller than it may have been.

I really appreciate everyone's help!
2cents2
Posts: 518
Joined: Sun Mar 02, 2014 11:31 am

Re: Leaving a job - what to do with retirement plan balance

Post by 2cents2 »

Travis1 wrote: Wed Jun 09, 2021 10:44 am Good Morning,

My wife and I are both about to leave a place where we've been employed for 13 years. We've both contributed a solid chunk of money to the pension program, but one or more likely both of us may opt to take our contributions out of the pension. Our contributions have been before-tax.

Our options are as follows:
1. Leave the money in and collect a small pension later in life. I don't like this option personally as I'm not confident the pension won't take a haircut.
Is your pension covered by the PBGC?

Here is a clip from FAQs about Retirement Plans and ERISA from the U.S. Department of Labor web site:
Can a plan reduce promised benefits?
Defined benefit plans may change the rate at which you earn future benefits but cannot reduce the amount of benefits you have already accumulated. For example, a plan that accrues benefits at the rate of $5 a month for years of service through 2010 may be amended to provide that for years of service beginning in 2011 benefits will be credited at the rate of $4 per month. Plans that make a significant reduction in the rate at which benefits accumulate must provide you with written notice generally at least 45 days before the change goes into effect.

Also, in most situations, if a company terminates a defined benefit plan that does not have enough funding to pay all of the promised benefits, the Pension Benefit Guaranty Corporation (PBGC) will pay plan participants and beneficiaries some retirement benefits, but possibly less than the level of benefits promised. (For more information, see the PBGC's Web site at pbgc.gov.)

https://www.dol.gov/sites/dolgov/files/ ... liance.pdf

Can you get a copy of the Summary Plan Description for your pension plan?

The reason I ask is because DH was covered under a pension plan at one of his previous employers. We did not really understand all the fine points of the pension plan when he left. DH's plan had been frozen a couple of years prior to when he left. We had decided to leave the contributions in the pension plan. As it unfolded we discovered the contributions were earning interest (4% IIRC). 4% interest wasn't that awful and we just considered it part of our bond allocation. Also, over time the company was anxious to get rid of the pension obligations and offered buyouts (about 4X what the contributions and interest were IIRC).

Are your future pension benefits covered by a COLA?

Is there any chance you might go back to work for the same employer in the future?
Post Reply