Pension plans are retirement plans established by employers to provide eligible employees with a fixed income during retirement. Pension plans generally designate age 55 as an early retirement age, with full pension benefits paid if you wait until age 65 to start collecting. Loans and early distributions are not allowed from most pension plans, but check with your employer to determine your specific options.
Pension plans are designed to give you a fixed income stream during retirement. Defined benefit plans are non-elective plans funded with employer contributions exclusively. Essentially, the money is not yours until you retire. In fact, you may need to work for the employer for at least five years to become fully vested; vested is a term that refers to owning the money. If you aren't vested and you leave the company, you don't get pension benefits. If you are vested and leave the company, you are guaranteed your benefits. Your payments are determined by how long you worked for the employer. These plans do not allow early distribution or loans.
Defined Contribution Plans
Defined contribution pension plans don't promise a specific income benefit. Instead, participants, employers or both contribute a percentage of income set aside annually. Contributions are invested and grow with cash value. If you leave the company, you can rollover the assets. These account may have early distribution provisions or loan allowances. Your plan administrator has details regarding what provisions are acceptable to the plan based on Internal Revenue Service regulations.
The IRS frowns upon early distribution from retirement savings account, mitigating people using tax-deferred structure for savings purposes other than retirement. The penalty for taking distributions out before retirement age, generally considered age 59 1/2 by most retirement savings accounts, is 10 percent. You take distributions by contacting your plan administrator and requesting a distribution form. You are allowed to take any assets that are your contributions or completely vested. Some defined contribution plans allow loans. This is a good alternative if you are able to repay the money. Loans don't erode retirement funds, and you pay yourself interest back. The IRS allows you to access $50,000, but no more than 50 percent of your vested plan value as a loan.
The IRS does allow some exceptions to the 10 percent penalty on defined contribution plans. You may use $10,000 toward the purchase, building or remodel of a first home for yourself, child or grandchild. College education expenses are also given waivers of the penalty. You may use defined contribution benefits to prevent a foreclosure or eviction. Another exception includes using distributions to pay excessive medical expenses that exceed 7.5 percent of your gross annual income. You still need to record distributions as income even if you qualify for a waver.