When can I take money out?

Money comes out at the events the plan document names: when you leave the business, when you reach the plan’s normal retirement age, when the plan ends, or, if the document allows it, while you are still working from age 59½. The plan document decides which of those events it offers.

Contributions are deducted now. Earnings inside the plan are not taxed while they stay in the plan. Every dollar paid out is ordinary income to the person who receives it. The IRS puts the working-age rule this way: “Generally, a defined benefit plan may not make in-service distributions to a participant before age 59 1/2.”

Yes. A payment before age 59½ is taxed as ordinary income plus a 10 percent additional tax on the taxable part, under section 72(t) of the tax code, unless an exception applies. A direct rollover to an IRA or another employer plan is not taxed when it moves, so neither tax applies at that point.

The exceptions in section 72(t)(2) include a payment made after the participant’s death, a payment made because the participant is disabled, and a series of substantially equal periodic payments over the participant’s life. Whether an exception fits a given payment is a question for your CPA before the payment is made.

Yes. A lump sum from a defined benefit plan is generally an eligible rollover distribution under section 402(c), and it can move to an IRA or to another employer’s plan. A direct rollover moves it from plan to account. A payment made to you can still be rolled over within 60 days of the day you receive it.

Annuity payments made over a lifetime and required minimum distributions cannot be rolled over. The IRS may waive the 60-day limit in some cases. A lump sum can also go to a Roth IRA: the pre-tax amount counts as income in the year of the rollover, and the 10 percent additional tax does not apply to the rollover itself.

A defined benefit plan must offer a life annuity, and a married participant receives a joint and survivor annuity unless the spouse consents in writing to another form, under sections 401(a)(11) and 417. A plan may also offer a lump sum if its document provides one, and in a cash balance plan the lump sum is generally the account balance.

A plan may pay out a vested benefit worth $7,000 or less without the participant’s consent. Above $7,000, the participant must consent before the benefit is paid out at once, and a married participant’s spouse must also consent to any form other than the joint and survivor annuity. The benefit formula matters even to a participant who takes a lump sum, because the lump sum is the value today of the annuity the plan promises.

Yes. A defined benefit plan must start paying a participant by the required beginning date in section 401(a)(9), which follows the year the participant reaches the applicable age: 73 today, rising to 75 for later birth years. A working employee may usually wait until retiring, but an owner of more than 5 percent of the business may not.

A defined benefit plan pays its required minimum as an annuity or over a set period. The inherited account rule in section 401(a)(9)(H) is written for defined contribution plans, not for a defined benefit plan. A required payment that is missed is taxed at 25 percent of the shortfall, or 10 percent when it is corrected within the correction window, under section 4974.

Only if the plan document allows loans; no plan must offer them. Where loans are allowed, section 72(p) caps a loan at the lesser of $50,000, reduced by recent loan balances, or the greater of one-half of the vested benefit or $10,000. A 412(e)(3) plan may have no policy loan outstanding at any time in the plan year.

A loan secured by the benefit needs the spouse’s written consent under section 417(a)(4). A loan that is not repaid on its terms is generally treated as a taxable distribution of the whole unpaid balance.

What is a 412(e)(3) plan?

No. Hardship withdrawals are a feature of 401(k) plans under section 401(k)(2)(B). A defined benefit plan pays only at the events its document names, and the IRS states that a defined benefit plan generally may not pay a participant who is still working before age 59½.

A plan loan is a different matter: a participant may borrow only if the plan document allows loans, and the loan must be repaid on its terms. Ending the plan is a separate decision with its own rules and its own tax on any surplus the employer takes back.

How do I end the plan?

A married participant’s spouse receives a qualified preretirement survivor annuity under sections 401(a)(11) and 417, unless the spouse waived it in writing. Otherwise the vested benefit goes to the beneficiary the participant named under the plan, paid under the plan’s terms and the required distribution rules.

A surviving spouse may roll a lump sum over as if the spouse were the participant, under section 402(c)(9). A beneficiary who is not the spouse may move a lump sum to an inherited IRA only by a direct transfer, under section 402(c)(11). The Department of Labor’s abandoned plan program is written for individual account plans, so it does not take over a defined benefit plan left without a sponsor.

It depends on your age. The lock is on the age at which money comes out without the additional tax, not on how long the plan must run. A payment after age 59½ carries no additional tax, and when you leave the business or end the plan, the money can roll to an IRA and stay tax deferred.

The lock is still real: money stays in the plan until age 59½, separation from the business or the end of the plan, with a 10 percent additional tax on a payment taken early. An owner can end the plan when a real business reason exists, such as a sale, a retirement or a lasting drop in income, though a plan is meant to be permanent.

How do I end the plan?

What are the risks?