How to Transfer a Defined Benefit Plan to an Annuity
Jason Stolz CLTC, CRPC
Transferring a defined benefit plan to an annuity is a powerful way to take control of your retirement income. Instead of relying on a company-managed pension, you can roll your lump-sum benefit into an annuity that you own. This allows you to maintain tax-deferred growth, customize income options, and preserve survivor benefits—without losing the guaranteed lifetime paycheck you’ve earned.
If you’re still evaluating your options, start by reviewing how a defined benefit plan works to understand how lump-sum values are calculated. Then, explore how an annuity can continue those guarantees while offering flexibility in design and payout timing.
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Who Can Transfer a Defined Benefit Plan?
Employees leaving a company or retiring often have the option to take a lump-sum distribution of their defined benefit plan. This lump sum can be rolled directly into a qualified annuity without taxation if done correctly. Transfers are commonly available for:
- Corporate pension plan participants
- Cash balance plan holders
- Union or public service retirees offered lump-sum buyouts
Each plan specifies how the benefit is calculated—typically using service years, final average pay, and an actuarial interest rate. A direct rollover to an annuity allows you to continue compounding the value tax-deferred.
Why Transfer to an Annuity?
Transferring to an individual annuity keeps the concept of a lifetime income but adds customization and ownership. Advantages include:
- Guaranteed lifetime income: Choose single or joint-life income options that mirror or exceed pension payouts.
- Tax deferral: Continue compounding without triggering income tax until distributions begin.
- Survivor control: Elect spousal continuation, period-certain guarantees, or enhanced beneficiary protection.
- Rate shopping: Compare top carriers and today’s annuity rates for the highest possible income guarantee.
Step-by-Step: How to Transfer a Defined Benefit Plan to an Annuity
- Confirm eligibility: Request a lump-sum quote from your plan administrator to understand your total commuted value.
- Select the right annuity: Choose between fixed, indexed, or immediate income annuities depending on your timeline.
- Open a receiving account: The annuity carrier establishes a qualified account to receive funds directly.
- Initiate a direct rollover: Ask your plan to send the lump sum directly to the new carrier—never take possession of the funds. Learn what a direct rollover means.
- Customize income start date: Align annuity payouts with your Social Security or other retirement income sources.
Tax Treatment of Defined Benefit Rollovers
By using a trustee-to-trustee transfer, your defined benefit funds maintain full tax deferral. No income tax or early withdrawal penalties apply during transfer. Once income begins, payments from the annuity are taxed as ordinary income. Roth-converted plans may qualify for tax-free distributions.
Defined Benefit vs. Personal Annuity — Key Differences
| Feature | Defined Benefit Plan | Personal Annuity |
|---|---|---|
| Control | Employer controlled | You own and customize payouts |
| Income Options | Fixed formula payments | Flexible lifetime or deferred payouts |
| Beneficiary Rights | Limited survivor choices | Full spousal and estate options |
| Rate Comparison | Fixed by employer | Shop carriers and compare annuity rates |
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FAQs: Defined Benefit Plan Rollovers
Can I transfer my defined benefit plan to an annuity without taxes?
Yes. As long as the funds move via direct trustee-to-trustee transfer, the rollover remains tax-deferred and avoids early withdrawal penalties.
What type of annuity can I use for my defined benefit rollover?
Qualified fixed, indexed, or immediate annuities can accept defined benefit rollovers, preserving the tax-deferred status of the funds.
When can I transfer my defined benefit plan?
Most transfers occur at retirement, separation from employment, or during lump-sum buyout windows offered by the plan.
Will I lose my pension guarantees by rolling into an annuity?
No. Annuities continue the concept of guaranteed income for life but with greater flexibility and ownership control.
Can I include my spouse in the annuity income?
Yes. You can elect joint-life or survivor continuation options to ensure your spouse receives income after your passing.
What are the main advantages of rolling over a defined benefit plan?
Tax deferral, customizable income, full beneficiary control, and the ability to compare carrier rates for higher guaranteed payouts.
How long does the rollover take?
Most transfers complete within two to four weeks depending on employer and plan administrator processing times.
