A cash balance plan is a pension plan under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest credits.
Easy to understand, straight forward hypothetical account balance is established for each participant as follows: Beginning Balance + Contribution Credits (usually defined as a % of pay) + Interest Credits (defined in plan document, guaranteed interest) = Ending Balance.
Cash Balance Plans Allow Six Figure Contributions
Most people can contribute to their 401(k) without worrying about exceeding the annual contribution limit. If you’re under 50 years old, that’s $19,500 a year. If you’re 50 or older, it’s $25,000.
But a small and important segment of the population has the ability – and desire – to contribute significantly more to their retirement account. If you’re looking to save even more on taxes and put up to six figures per year into your retirement account, a Cash Balance plan may be the right choice.
This video below introduces Cash Balance plans, a retirement plan design that allows significantly higher contribution limits and drives faster asset accumulations than a 401(k). Watch this month’s video and read our blog on Cash Blalance Plans to learn more. If you’re intrigued, let’s chat and see if your situation and goals might be a good fit.
Advantages of a Cash Balance Plan:
Large tax deductions
For the company, money contributed to the plan is tax deductible now.
For participants, taxation on benefits is deferred until received as income.
Accelerated retirement savings for Owners and Key employees
Yes, but with restrictions. Cash Balance plans can be amended periodically to permit different contribution levels. Any changes must be made before any employee works 1,000 hours during a plan year. In addition, a plan can also be frozen or terminated.
Yes, like any other qualified plan, a Cash Balance Plan is subject to nondiscrimination testing. Employers can anticipate contributions in the range of 5% to 7.5% of pay for staff. The exact percentage required for employees depends on the results of nondiscrimination testing.
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