Rolling Over a Defined Benefit Plan is an increasingly attractive strategy for retirement investors seeking more control over their assets. The main reason investors turn to a Self-Directed IRA is simple: they want access to a wider range of investment opportunities and greater diversification. For defined benefit and cash balance plan owners, this flexibility is especially valuable, as it allows them to diversify the substantial wealth accumulated within their pension plan. Once the plan has reached its permitted benefit limits, transitioning those funds into a Self-Directed IRA can offer a powerful

What is a Self-Directed IRA?

A Self-Directed IRA is an IRA that allows you to invest in non-traditional or alternative assets. This can include real estate, private placements, metals, notes, and more. In general, a Self-Directed IRA can invest in almost any asset except:

• Collectibles
• Life insurance
• Any investment that directly or indirectly benefits a disqualified person, such as the IRA owner, their lineal descendants, or any entity they control

The tax advantage is what makes the structure so powerful. All income and gains flow back to the IRA without current tax. In the case of a Roth IRA, the growth can be tax free.

Read More: Self-Directed IRA Prohibited Transaction Rules

Self-Directed IRA Rollover

One of the most common ways to fund a Self-Directed IRA is through a contribution, transfer, or rollover. The IRS allows you to move money or property from another eligible retirement account into a Self-Directed IRA without tax or penalty. This includes IRAs, defined contribution plans such as 401(k)s, and defined benefit or cash balance plans. Rollovers remain the most popular method for funding IRAs. Recent data shows that retirement savers rolled roughly $747 billion into IRAs in 2023, and that number increased to about $807 billion in 2024, highlighting the continued strength of rollover activity.

Under IRS rules, pre-tax defined contribution or defined benefit plan assets can be rolled into a pre-tax IRA tax free, and Roth plan assets can be rolled into a Roth IRA tax free as well.

Defined Contribution Plans

The most common type of defined contribution plan is the 401(k). A 403(b) or 457(b) plan also falls under this category. These plans do not guarantee retirement benefits. They are funded mainly by employee contributions, with optional employer matching.

In most cases, a participant cannot roll funds from a defined contribution plan into an IRA unless a plan triggering event has occurred. Triggering events generally include reaching age 59 and a half, leaving the employer, or the plan being terminated. Without one of these triggering events or a specific exception such as hardship, a rollover usually cannot occur.

Defined Benefit/Cash Balance Plan

A defined benefit or cash balance plan guarantees a specific retirement benefit funded entirely by the employer. Cash balance plans have become the most popular version of defined benefit plans.

The main advantage of these plans is the ability for a business owner to contribute much larger amounts each year on a tax deductible basis. Over time, the plan can generate significant tax deferred wealth.

A defined benefit or cash balance plan is required to be permanent. The IRS has not issued specific guidance on how long the plan must remain open to satisfy the permanency requirement, but most tax professionals recommend keeping the plan open at least three to five years. Rolling over the plan before that period may risk violating the permanency rule. It is essential to work closely with the plan administrator or actuary before making any rollover decisions.

Investment Decisions

Most defined benefit and cash balance plans follow a conservative investment strategy. This is because the plan must maintain steady, predictable returns to meet the promised benefit amount. Actuaries commonly use a four percent interest rate assumption when calculating required contributions under IRS guidelines. A conservative projection gives the business owner more flexibility and reduces the risk of a funding shortfall during down markets.

For this reason, most financial advisors recommend keeping plan investments within an annual return range of roughly four to six percent. The goal is to avoid underperformance that would force the business owner to make additional contributions.

Rolling Over a Defined Benefit Plan

Once the plan has generated all its permitted benefits and has been open long enough to satisfy the permanency requirement, many business owners choose to roll the funds into a Self-Directed IRA. The rollover is tax free and the process is straightforward.

Here is the typical sequence:

• Establish a Self-Directed IRA with a qualified custodian such as IRA Financial.
• Confirm with your pension plan administrator that the plan funds are eligible for rollover.
• Ensure that the plan assets you intend to roll over are held in cash.
• Complete the rollover into the Self-Directed IRA.
• Once funded, you can begin making IRS approved alternative investments.
• All income and gains go back to the IRA without tax.

Conclusion

A defined benefit or cash balance plan remains one of the most powerful and underrated retirement plans available to small business owners. These plans allow high annual tax deductible contributions and can produce substantial long term, tax deferred retirement wealth.

Because defined benefit plans often accumulate large balances, many business owners eventually choose to roll those assets into a Self-Directed IRA. This provides more control over investment decisions and access to a wider range of asset classes, including real estate and other alternatives.

Before initiating a rollover, it is important to confirm that the plan has been in existence long enough and is fully funded under the plan guidelines. Once eligible, a rollover into a Self-Directed IRA is tax free, penalty free, and can open the door to greater diversification and long term growth opportunities.

If you want to learn more about self-directed options for your defined benefit or cash balance plan, you can speak with a self-directed retirement specialist at 800.472.1043.