You may or may not be able to receive money from a retirement pension plan if you are terminated. Being terminated, in itself, does not have any effect on your eligibility for a pension, but if you are not yet vested when you retire, you may not be able to receive the retirement savings accumulated in your plan.
Before You Are Vested
If you are terminated before you are fully vested in your retirement plan, you may lose some or all of your pension benefits. Some retirement plans have "graded vesting," meaning that the longer you work for the company, the more of your retirement savings you keep when you leave. After working for two years, for example, you may be able to keep only 20 percent of the money in your plan; after five years you may be fully vested, and you can take the money with you. Other retirement plans have "cliff vesting." Until you have worked a certain number of years -- five years, for example -- you get nothing from your plan when you leave; after five years, you get to keep it all.
Your Contributions vs. Company Contributions.
A common feature of 401(k) plans is that when you contribute money to your retirement plan, your employer matches it -- up to a certain dollar limit each year -- or contributes some percentage of your contribution. Money you contribute is not subject to vesting restrictions. Even before you are vested, if you leave the company, you keep the money you contributed, but because you are not vested you lose your employer's share.
Money That Stays in the Plan
If you are in a very large pension system, you may not have the right to take money out of the plan if you are terminated and you have a new job covered by the same plan. If you are terminated as a California State University employee, for example, and get a new job as a state parks employee, your money stays in the plan, which is managed by the California Public Employees' Retirement System, known as CalPERS. When you are not moving from one job to another where both have retirement plans managed by the same administrator, you have the right, assuming you are vested, to move the money where you want.
Where the Money Goes Matters
Some 401(k) plans allow you to keep the money in the plan even if you are no longer employed by the company that set it up. Otherwise, if you take a cash settlement from the retirement plan you are leaving, you must reinvest it in another qualified pension plan within 60 days, or your funds are subject to a 10-percent federal tax penalty. All the funds you withdraw also count as income in the current tax year if you don't reinvest in a qualified plan, and you must pay taxes on them. One commonly used choice for reinvestment is a self-directed individual retirement account, or IRA. With such an IRA, you are the plan administrator, and you decide how to invest the money in the account.
- Investing for Retirement, Ralph Warner
- IRAs, 401(k)s & Other Retirement Plans: Taking Your Money Out, John Suttle, CPA and Twila Slesnick, PhD
Patrick Gleeson received a doctorate in 18th century English literature at the University of Washington. He served as a professor of English at the University of Victoria and was head of freshman English at San Francisco State University. Gleeson is the director of technical publications for McClarie Group and manages an investment fund. He is a Registered Investment Advisor.