Do you have a Cash Balance Account (CBA)? A CBA is an account hybrid between a pension and a tax deferred savings account. Most employers today do not offer traditional pensions anymore they offer some version of a tax deferred contribution account (401K, SEP IRA, Roth 401K, and others).
About 10 years ago, I left an employer who previously had offered both a traditional pension as well as a 401K account. The creation of the CBA enabled the employer to hand off the pension obligation to me.
There are some upsides and downside to this kind of arrangement depending on your point of view.
- First, it moves the management of the pension risk from the employer to the employee (not unlike a 401K).
- The CBA severs the pension obligation from the balance sheet of the employer. So, the pension is not tied to the future success of the employer the way many traditional pensions are because it is funded independently in a separate account.
- The CBA offers the opportunity for the employee to roll the money over to an IRA providing additional investing opportunities.
- The CBA provides more transparency about pension value and the investment rate of return.
If you have one of these accounts these are some of your options.
The CBA can be left in the original account that was setup with the employer. Over the past 10 years this has been a good strategy for me because it has earned a fixed positive return that has performed better than other retirement accounts I have. Even when retirement starts the money can still stay there and I can start to draw a pension from it without moving it.
Roll Over to an IRA
Because the CBA has a cash value, it can be rolled over to an IRA, either one you already have or in a new account. Whenever you roll over an account be cautious about how this is done. What you want to do is have the administrator cut the check to the new IRA and not to you. This will prevent the rollover from being viewed as an early distribution from the IRS. (If this does happen, it can be fixed, but it is an unnecessary hassle).
Roll Over to a 401(k)
It may be possible to roll the money over to an existing account (401(k), SEP IRA, etc.) that you have with your employer. Check with your account administrator as to whether or not they will accept the rollover. In general this option may not offer the range of investment opportunities that a roll over to an IRA would.
Draw from the CSA
If you decide to retire early, or even if you don’t, you can start drawing a pension at anytime (it does still keep the benefits of a pension account) . There is an advantage here over an IRA, which are not by default setup to draw a pension (particularly for early retirement). You can do the same thing in an IRA but you need to file paperwork to do this – I will cover this option in a future article.
The downside to this option is that you need to keep the money in the CSA, which will typically offer a lower return on investment than other options you would have in an IRA (stocks, bonds).