Many retirement advisors recommend that you save at least 10% for your future retirement. I believe that you should have a retirement planning professional calculate your number. After that exercise, you may find that you need to engineer a savings rescue.
Cash balance plan savings rescue for small business
Let’s say that you are over 50 and need to save $22,500 you can do that with your 401k contribution alone. If you need to save $55,500, you can do so with a profit sharing and 401k combo plan. What if you need to save even more? Enter cash-balance plans. A cash-balance-plan contributions, which vary by age, can be as much as $200,000 a year. In the right situation, the combination of the 401k plus the profit sharing plus the cash balance totals near $250,000 in tax reducing retirement savings.
A cash-balance plan is a defined-benefit plan that specifies the contribution to be credited to each participant and credits investment earnings based on those contributions. Each participant has an account that resembles those in a 401(k) and/or profit-sharing plan. Those accounts are maintained by the plan actuary, who generates each annual participant’s statement.
When participants terminate employment, they become eligible to receive the vested portion of their account balances, as determined by the plan’s vesting schedule. Law firms typically make certain that partner accounts are fully vested.
The advantage of a cash-balance plan
Compared to traditional defined-benefit plans, each partner knows is going in to the plan and what they are going to get out. Employers can designate different contribution amounts for various participants, but there is a restriction on the frequency of amendments unless a valid economic reason exists. For example, if a firm’s profits are not expected to support its cash-balance-plan contribution, then the plan can be amended. A cash-balance plan also can be frozen or terminated. Its important to work with an actuary that understands the rules and customization options.
The first step is to determine your retirement savings needs. If you need to save more than the 401k and profit sharing maximum, then it may be time to call in a cash balance plan to the rescue.
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