Cash Balance Plans

Cash Balance Plans- Squeeze 20 years of retirement savings into 10!

If you’re like many Doctors, Engineers, Lawyers, or “ologists” (i.e. Radiologists, Cardiologists, etc.) that own your own practice, you’ve put off saving for your own retirement due to paying off huge student loans, paying for your kids’ educations, etc. With taxes taking half of your income, how do you ramp up your savings so you can enjoy your current lifestyle into retirement?

Enter the Cash Balance Plan!

What is a Cash Balance Plan?
A cash balance is a hybrid between a Defined Contribution plan (where you define the contribution that you’ll be making, such as a 401k) and a Defined Pension plan (where you define the future benefit). In a cash balance plan, the employer will set how much each employee receives each year, plus an interest rate (or other sort of return).
What Are the Benefits of a Cash Balance Plan?
A Cash Balance Plan allows a business owner to defer significantly more than a conventional retirement plan. For example, for a 60 year old, we could effectively increase the amount they defer by $228,000 by introducing a Cash Balance Plan to work in tandem with their 401(k) and Profit Sharing Plan.

In addition to the huge deferral and tax savings opportunity, Cash Balance plans are;
• Portable- When employees leave, or you sell or shut down your company, you can simply roll it over to an IRA.
• Safe from creditors- As ERISA plans there is generally bankruptcy and creditor protection.
• Easy to understand- Your employees will appreciate the simple annual contribution and the interest rate they receive.
• Payroll taxes- Unlike payroll deducted 401k contributions, there is no payroll taxes paid on the amount that the business puts into this plan.

What Are the Drawbacks of a Cash Balance Plan?
Unlike a Defined Contribution plan, the business is required to make a contribution every year. Although the plan can be adjusted, businesses with very lumpy income should think twice about setting these up. In addition, these plans are more complex than a 401(k) plan, so they require a bit more thought and have slightly higher expenses to operate.

Who Is the Best Candidate for a Cash Balance Plan?
The best candidates to implement a Cash Balance Plan are owners of businesses that have high, and relatively stable taxable earnings. In addition, in order to get the most of the benefits, it’s helpful if the owners are a bit older than their employees generally (usually 10 year age difference gives us enough of a gap). If your business has these characteristics, and you desire to save tax money this is a plan design that you should evaluate.

When do I need to set this up?
If you would like to save money for 2015, this plan needs to be designed and fully implemented by year end. As these plans are more complex than a typical 401k plan, this takes up to a month. Our internal deadline for new plans is December 1st, however, more time is better to implement and optimize appropriately.

How do I find out more?
At Beacon Hill, we focus on corporate retirement plans, please call us at 614-905-6233 for a free analysis of what a Cash Balance Plan would look like. It’s an easy process for us to review, just send us your most recent census (names and social security numbers can be taken off) and we will have a scenario to you within a week.

Author: Clint Edgington