Cash balance plans for retirement planning

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.

Retirement planning    Retirement savings

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.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI


About Envision Wealth Planning

I empower smart people to make smarter money choices that honor their personal values. After working together to develop a holistic plan, I help clients navigate the emotions and self-expression that can derail financial wellness. I use Financial Life Planning as a tool to propel client’s values, goals, and passions forward. I help clients figure out strategies to fund and maintain a sustainable retirement, plan for funding college, manage student loan debt, balance current lifestyle with savings goals, assist with financial planning during a divorce, and align values with your investments. I have an MBA from MIT Sloan. My financial designations include Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst® and College Funding and Student Loan Advisor.
This entry was posted in 401k Savings, Cash balance, Fiduciary duties, Retirement planning, Retirement savings and tagged . Bookmark the permalink.

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