Larger Tax Deductions and Accelerated Retirement Savings
Being a business owner, you know firsthand how important strategic planning is to your ongoing success.
In fact, your attention has likely been focused on the timely, agile moves that help your business grow. In doing so, maybe you haven’t taken the time to set aside as much money as you would have liked in your retirement plan account. And maybe other employees haven’t saved enough either.
If you are midcareer and planning ahead, or if you are nearing retirement and want to gear up for a powerful finish, a cash balance plan may help.
In general, if your company has highly compensated employees, if key employees are close to retirement, or if you’ve missed out on contributions in the past, now could be the time to evaluate the benefits of a cash balance plan.
The Basics of Cash Balance Plans:
A cash balance plan is a defined benefit retirement plan, with similarities to a defined contribution plan. In a cash balance plan, participants have individual hypothetical accounts and account balances. Participants may be entitled to a lump-sum distribution upon termination of employment or retirement, like in a defined contribution plan, or promised a monthly income stream like that in a traditional defined benefit plan.
HOW IT WORKS
You, as the business owner, can establish a cash balance plan on its own or in addition to a defined contribution retirement plan you already offer, such as a 401(k) or 403(b) plan. Assets in a cash balance plan are held in a pooled account, like a traditional defined benefit plan. You make contributions to the pooled account on behalf of all participants, and benefits are paid from the pooled account as well.
MAKING PLAN CONTRIBUTIONS
As the plan sponsor, all contributions are made by you. Each year, you credit plan participants with a “pay credit” (such as 5% of compensation) and an “interest credit” (either a fixed interest rate or a variable interest rate).
MAKING INVESTMENT DECISIONS
You, as the business owner, manage the plan assets and make all investment decisions. Unlike a defined contribution plan, participants in a cash balance plan do not choose their own investments. Changes in the market value of the plan’s investments do not change the final benefit amount promised to participants at retirement or termination of employment. This means that promised benefits must be paid regardless of the profit or loss experienced by the cash balance plan investment portfolio. Although paying promised benefits is your responsibility, the benefits in most cash balance plans are protected by the Pension Benefit Guaranty Corporation.(1)
MAKING DISTRIBUTIONS TO PARTICIPANTS
There are two basic distribution options for participants — annuity payments or a lump-sum distribution. Payment amounts are based on the value of a participant’s hypothetical account. If a participant chooses a lump-sum distribution, it can be rolled over into an IRA or to another employer’s plan, if that plan accepts rollovers.
If you would like a no obligation, second opinion into your 401k plan, corporate retirement plan or more information on cash balance plans, give us a call at 630-799-8350 or email at info@crosspointwealth.com. We look forward to the opportunity to show we can help you and earn your business.
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1)In the event a defined benefit plan terminates before benefits are fully funded, the Pension Benefit Guaranty Corporation (PBGC) steps in to pay guaranteed benefits. The PBGC protects the retirement incomes of more than 40 million American workers in more than 26,000 private-sector defined benefit pension plans. PBGC collects insurance premiums
from employers that sponsor PBGC-covered pension plans. The PBGC does not insure pensions for small professional practices (a doctor, lawyer, or other professional with fewer than 25 employees.) Transamerica Retirement Solutions is not affiliated with the PBGC. For 2018, the maximum guaranteed amount is $65,045 per year for workers who begin
receiving payments from PBGC at age 65. The maximum guarantee is lower if you begin receiving payments from PBGC before age 65 or if your pension includes benefits for a 3survivor or other beneficiary. The maximum guarantee is higher if you are over age 65 when you begin receiving benefits from PBGC.
