A Balanced Approach
If you’re like many business owners, you may wonder how to leverage your business to maximize your retirement savings efforts. A cash balance plan may be one option, especially for highly paid principals and key executives of small corporations, partnerships and LLCs.
WHAT IS IT?
A cash balance plan offers a specific retirement benefit in the form of a lump sum paid for by the employer. The exact benefit is due upon a participant’s retirement. Employees — owners count as employees — have the option to convert their balances to lifetime annuities or take the lump sum. In contrast, traditional defined benefit plans must offer a guaranteed series of payments that last a lifetime.
Either way, a defined benefit plan puts the onus on employers to deliver the eventual retirement benefit, regardless of investment performance, while the performance of a defined contribution plan depends solely on employees, who may or may not receive contributions from their employers. Because investment performance is a factor in a defined contribution plan, the eventual benefit cannot be defined.
PROS AND CONS
Cash balance plans aren’t for everyone, but they can be advantageous for those seeking a larger benefit. Tax-deductible contribution limits are higher than for 401(k) plans and they rise with age, so more experienced employees stand to benefit from this feature. Benefits are also guaranteed and protected by the Pension Benefit Guaranty Corporation, subject to limits.
These plans are not inexpensive, and they must be audited annually. Cash balance plans must also fully vest all eligible employees after three years. However, a cash balance plan can help owners build a bigger retirement balance while attracting qualified workers. Talk to an experienced retirement plan specialist to learn more.
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