What a Money Purchase Pension Plan Is
A money purchase pension plan is a type of retirement plan where your employer puts a set percentage of your salary into an individual account in your name each year. The employer makes a fixed contribution — say, 5% or 10% of your pay — regardless of whether the company made a profit that year. You own the money in the account, and it grows through investment returns. When you retire, the balance becomes yours to use.
The key difference from other pension types is the predictability: the employer's contribution is fixed, not based on a formula tied to your final salary or years of service. You know exactly how much will go in each year. What you don't know in advance is how much it will be worth when you retire, because that depends on how the investments perform.
Key Takeaways
- Your employer contributes a set percentage of your salary each year, and that money goes into an account held in your name.
- The account grows through investment returns, which means the final balance depends partly on market performance, not just employer contributions.
- You are fully vested (own the money outright) after a set period, usually three to six years, depending on the plan rules.
- When you leave the job or retire, you can roll the balance into an IRA or another retirement plan, or take it as a lump sum.
- These plans are less common now than they were 20 years ago; most employers have shifted to 401(k) plans instead.
How Contributions and Vesting Work
Your employer decides the contribution rate when the plan is set up — often between 3% and 10% of your salary. That amount goes into your account every pay period or annually. The money is yours immediately in terms of ownership, but you may not have the legal right to take it with you right away. That right is called vesting.
Vesting schedules vary by plan. A common schedule is three-year cliff vesting, meaning you own 0% of the employer contribution for the first three years, then 100% after three years of service. Another common schedule is graded vesting — you might own 20% after two years, 40% after three years, and so on until you own 100% after six years. Your plan documents will state which schedule applies to you.
Any money you contribute yourself (if the plan allows employee contributions) is yours immediately. Only the employer contribution is subject to vesting rules.
Investment Risk and How Your Balance Grows
Unlike a traditional pension where the employer guarantees a specific monthly payment in retirement, a money purchase plan puts investment risk on you. Your employer contributes the fixed amount, but how that money grows depends on which investments you choose and how those investments perform in the market.
Most money purchase plans offer a menu of investment options — mutual funds, target-date funds, stable value funds, and sometimes company stock. You decide how to split your account balance among these options. If you choose aggressive investments and the market rises, your balance grows faster. If the market falls, your balance may shrink. The employer's contribution stays the same regardless; only the investment returns vary.
This is why money purchase plans are called defined contribution plans — the contribution is defined and fixed, but the benefit (what you end up with) is not may provide.
What Happens When You Leave or Retire
When you leave your job or reach retirement age, you have several options for the money in your account. You can roll it into a traditional IRA, which lets it keep growing tax-deferred. You can roll it into a new employer's retirement plan if that employer accepts rollovers. You can leave it in the plan if you have at least $5,000 in the account. Or you can take a lump-sum distribution — a single payment of the entire balance.
If you take a lump sum before age 59½, you will owe income tax on the full amount plus a 10% early withdrawal penalty, unless an exception applies (such as disability or a series of substantially equal payments). If you roll the money into an IRA or another plan, you avoid the tax and penalty as long as you complete the rollover within 60 days.
If you leave your job before you are fully vested, you forfeit the unvested portion of the employer contribution. For example, under a three-year cliff schedule, if you leave after two years, you lose all the employer money and keep only your own contributions (if any).
Money Purchase Plans Versus 401(k) Plans
Money purchase plans were common in the 1980s and 1990s, but most employers have switched to 401(k) plans because they are simpler to administer and more flexible. Here are the main differences:
| Feature | Money Purchase Plan | 401(k) Plan |
|---|---|---|
| Employer contribution | Fixed percentage, required every year | Discretionary; employer can skip or reduce in bad years |
| Employee contribution | Usually not allowed, or limited | Employees contribute; employer may match |
| Loans | Not allowed | Usually allowed up to 50% of balance |
| Withdrawals before retirement | Not allowed without penalty | Allowed for hardship; subject to tax and penalty |
| Compliance burden | Higher; strict rules on contributions | Lower; more employer flexibility |
If you have a money purchase plan from a past employer, the money remains yours and continues to grow. You can roll it into an IRA at any time to consolidate and simplify management.
Contribution Limits and Tax Rules
The IRS sets an annual limit on how much can go into a money purchase plan each year. For 2024, the limit is the lesser of 100% of your compensation or $69,000. Your employer's contribution counts toward this limit. If you make your own contributions, those count too.
Employer contributions to a money purchase plan are tax-deductible for the employer and not counted as taxable income to you in the year they are made. The money grows tax-deferred inside the plan. You pay income tax only when you withdraw it in retirement.
These limits and rules change periodically. If you are enrolled in a money purchase plan, your plan administrator should provide an annual statement showing your balance and the contributions made that year.
Frequently Asked Questions
Can I withdraw money from a money purchase plan before I retire?
Generally, no — not without owing taxes and a 10% penalty if you are under 59½. Some plans allow loans, but money purchase plans rarely do. Your best option is usually to leave the money in the plan until retirement or roll it into an IRA if you change jobs.
What if my employer stops making contributions?
If the plan is terminated, your employer must distribute your vested balance to you or roll it into an IRA on your behalf. Unvested contributions are forfeited. The employer cannot simply stop contributing while keeping the plan open — that would violate the plan's terms.
Do I have to invest the money myself, or does the plan do it for me?
You choose how to invest it from the menu of options the plan offers. If you do not make a choice, most plans will place your money in a default investment, often a target-date fund based on your expected retirement year. You can change your investment choices periodically, usually quarterly or annually.
Can I move money from a money purchase plan to a 401(k)?
Yes, if you change jobs and your new employer's 401(k) plan accepts rollovers. You can also roll it into a traditional IRA at any time. Contact your plan administrator or new employer's benefits office to start the rollover process.
What happens to my money purchase plan if the company goes out of business?
Your money is held in a trust separate from the company's assets, so it is protected even if the company fails. The plan administrator will distribute your vested balance or roll it into an IRA. Unvested contributions are forfeited.