It's nice to leave a job on your own terms, but you will have some planning to do to ensure you take everything you're owed with you. Resigning doesn't necessarily mean you have to kiss your pension plan goodbye. In many instances, you can roll the money into an Individual Retirement Account. However, pension plans vary. and your rights to your accrued pension benefits are based on the type of plan.
Defined Benefit Plans
Defined benefit plans are traditional pensions funded by your employer with regular contributions during your employment. When you retire, you'll get this predetermined benefit, usually as a monthly pension payment. The amount depends on your salary and your length of service. When you quit before retirement, your employer may allow you to take a lump sum withdrawal and close the account. However, many employers won't let you access this money until you reach retirement age. If that's the case, keep your former employer informed whenever you change addresses so they know where to send those pension checks in the future.
Your options increase if you've got a defined contribution plan that you've put a portion of your salary into all along. Your contributions belong to you, so you can access the money once you quit your job. You can roll it into an IRA or another pension plan so the money keeps its tax deferred status until you retire or access the funds. You could just cash in the account, but you'd have to pay income tax on the entire amount. You also have to pay a 10 percent tax penalty if you make withdrawals before you hit age 59 1/2.
Many employers make matching contributions to 401ks and other types of defined contribution plans. This cash becomes yours over a vesting period of three to five years. When you quit, you have access to the money vested to that point, but the rest is returned to your employer. With a three year vesting schedule, all of the money becomes vested three years after the deposit date. With five year vesting, the money becomes yours at a rate of 20 percent per year.
You may have the option to get a Simple IRA if you work in a small business with 100 or fewer employees. Simple IRAs are hybrid pension plans funded by employers but not subject to vesting rules. The money belongs to you from the day it's deposited by your employer, and you can cash it in or roll it into another retirement plan the day you quit. However, you can't roll it into a different type of pension plan until two years after the account was funded. Any rollovers or withdrawals prior to that date incur a 25 percent tax penalty. You also have to pay income tax on the withdrawal. You can escape the penalty if you roll it the cash into another Simple IRA within those two years.
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