Got a Cash Balance Pension? Understand Your Options
To maximize your retirement income, you need to know how your cash balance plan works, which type of payout is right for you and how it’s taxed.


As traditional pension plans have largely disappeared over the years, many Baby Boomers heading into retirement today will by relying on cash balance pension plans instead. Understanding how to make the most of this employer benefit becomes increasingly important as one nears retirement.
Cash balance pension plans became popular in the late 1980s and early 1990s, especially with companies such as IBM, Xerox and AT&T, which at the time had large liabilities in their traditional defined benefit pensions. Cash balance pension plans emerged as a hybrid between traditional defined benefit plans (aka, a pension) and defined contribution plans (such as a 401(k) plan), offering employees a portable retirement benefit. The plans gained popularity among employers seeking to manage their costs and risks, while providing competitive retirement benefits.
Individuals with a cash balance pension plan face numerous decisions as they near retirement. Understanding the various options available is crucial for maximizing retirement income and ensuring financial security.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Let’s review the considerations and choices one should explore when navigating their cash balance pension options.
The basics
Unlike traditional defined benefit pensions, which provide a specific monthly benefit upon retirement, a cash balance pension maintains a hypothetical account balance that grows based on company contributions and interest credits. Unlike a 401(k), the employee can’t select a menu of investment options from which to invest their balance. The company determines the cash balance plan’s crediting rate, sometimes quarterly, but most often set annually. Here are a few companies’ cash balance pension plans’ crediting rates for 2024:
- GlaxoSmithKline: 3%
- Duke Energy: 4.46%
- IBM: 5%
Upon retirement or separation from service, employees typically have several distribution options.
Option 1: A lump sum payment in cash.
Cash balance participants may consider taking a lump sum payment from their cash balance pension. However, the entire payment is taxed as ordinary income, which can be very costly. Participants should carefully weigh the tax implications associated with a lump sum distribution.
Option 2: An IRA rollover.
Participants can roll over their cash balance pension to an IRA. A direct rollover to a qualified retirement account is not taxable — but any withdrawals you take later on will be taxed. An IRA rollover offers a couple of major advantages: It provides the participant with greater investment options, and it allows for more flexible income tax planning.
Keep in mind that if you leave a company before retirement, some companies don’t allow a rollover until the participant reaches a specified age. In addition, some employers require those with small cash balance pension benefits (say under $10,000) to exit the plan — either in lump sum or IRA rollover — when separating from service.
Option 3: Annuity payments.
Another option is to convert the cash balance pension into a series of annuity payments. Annuities provide a steady stream of income over a specified period, offering retirees a predictable source of retirement income. Retirees should compare different annuity providers and payment options to find the most suitable arrangement for their financial needs and goals.
Participants can also opt for some combination of these different options. For example, a participant might decide to take annuity payments for 50% of their cash balance pension and do an IRA rollover with the other 50%.
Other considerations
As interest rates have risen, the crediting rates of some cash balance pension plans are lower than CD rates, making the rollover option more attractive. Participants should also remember that cash balance pension plans are subject to the same required distribution rules as IRAs.
Cash balance pension plans are an often-overlooked component of one’s retirement nest egg. Navigating retirement options with a cash balance pension requires careful consideration and planning. By understanding the available options, evaluating individual goals and managing cash balance pensions in concert with 401(k) and Social Security benefits, retirees can pave the way for a secure and fulfilling retirement journey.
Related Content
- Five Things Your Annuity Seller Won’t Tell You
- A Public Pension and Full Social Security Benefits? No Way
- Social Security Basics: 12 Things You Must Know to Maximize Your Social Security Benefits
- Pension Lump Sum Option vs. Annuity Payment: Which Is Better?
- Before You Retire, Consider These Five Questions
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Mike Palmer has over 25 years of experience helping successful people make smart decisions about money. He is a graduate of the University of North Carolina at Chapel Hill and is a CERTIFIED FINANCIAL PLANNER™ professional. Mr. Palmer is a member of several professional organizations, including the National Association of Personal Financial Advisors (NAPFA) and past member of the TIAA-CREF Board of Advisors.
-
The Most Tax-Friendly States for Investing in 2025 (Hint: There Are Two)
State Taxes Living in one of these places could lower your 2025 investment taxes — especially if you invest in real estate.
-
Want To Retire at 55? See If You Can Answer These Five Questions
Who said you can’t retire at 55? If you say yes to these questions, you may be on your way to an early retirement.
-
Potential Trouble for Retirees: A Wealth Adviser's Guide to the OBBB's Impact on Retirement
While some provisions might help, others could push you into a higher tax bracket and raise your costs. Be strategic about Roth conversions, charitable donations, estate tax plans and health care expenditures.
-
One Small Step for Your Money, One Giant Leap for Retirement
Saving enough for retirement can sound as daunting as walking on the moon. But what would your future look like if you took one small step toward it this year?
-
This Is What You Really Need to Know About Medicare, From a Financial Expert
Health care costs are a significant retirement expense, and Medicare offers essential but complex coverage that requires careful planning. Here's how to navigate Medicare's various parts, enrollment periods and income-based costs.
-
I'm a Financial Planner: Could Partial Retirement Be the Right Move for You?
Many Americans close to retirement are questioning whether they should take the full leap into retirement or continue to work part-time.
-
From Mortgages to Taxes to Estates: How to Prepare for Falling Interest Rates
As speculation grows that the Federal Reserve will soon start lowering interest rates, now is a good time to review your financial plans for housing, estate, taxes, investing and retirement to make the most of potential changes.
-
This Is How Lottery Winners Build Lasting Legacies, From a Financial Professional
Winning a massive lottery jackpot, like the recent $1.4 billion Powerball, requires seeking immediate legal and financial counsel, protecting your identity and winnings and planning your legacy.
-
I'm an Investment Strategist: This Is How the Fed's Next Rate Move Could Impact Your Wallet
Interest rate cuts might be coming, which could affect everything from your credit card debt to your mortgage. It's smart to prepare now — here's how.
-
I'm a Retirement Planner: These Are Three Common Tax Mistakes You Could Be Making With Your Investments
Don't pay more tax on your investments than you need to. You can keep more money in your pocket (or for retirement) by avoiding these three common mistakes.