The Benefits of a Cash Balance Plan

Our consultants will let you know of all the benefits to be had from a Cash Balance plan

Many of our clients are looking for a way to reduce their tax obligations and implementing a cash balance plan as a part of your company’s retirement benefits is a phenomenal way to do so. Contributions to these types of plans have the same effect as a deduction that reduces ordinary income dollar for dollar. So for example, if you make $500K this year and contribute $200K to a cash balance plan, you will only be taxed as if you made $300K and your contribution will be allowed to grow tax-deferred which allows for higher asset growth until retirement. When you retire and begin withdrawing from your account, you will be taxed on your money as it is received (you may use an IRA rollover to manage the tax impact). Overall, the hope is you will be in a lower tax bracket when the funds are paid, but it also helps to have a larger amount of cash accumulating interest in your account.

Not only can you reduce your personal tax obligations, but you can reduce your company’s obligations through the use of a cash balance plan. Contributions for owners & their employees count as a tax deduction for the company. Contributions on behalf of owners are either a company or a personal tax deduction depending on whether or not the company is the plan sponsor.

As always, if you have questions on this or need more, feel free to reach out to your Odyssey consultant for more information.

Nothing in this publication should be considered tax advice.  We encourage you to consult your tax professional to see if this type of plan may serve your needs.

5 Reasons You Should Consider Adding a Cash Balance Plan to Your 401(k)

Everyone is always looking for a way to save more money for their retirement. A cash balance plan can be a great way to do that. You can read more about what we’ve written about this type of plan here, but these are the top five (5) reasons we think you should consider implementing one for your business.

  1. Higher contribution limits: This is by far the biggest advantage to implementing a cash balance plan. Depending on your age, you can stash away up to an extra $225K/year or more into your savings, and that’s in addition to your existing 401(k) plan! This can result in serious savings on your part.
  2. Easier to understand: Each year you and your participants receive an account statement that includes your balance and how it’s changed over the last year. This is valuable because it gives the plan more meaning to your employees and gives you a better idea of what you will have at retirement.
  3. Lower risk of underperformance: As participant account values grow based on a fixed interest rate or index, it allows for predictable growth.  While the underlying liabilities will change with interest rates like any Defined Benefit plan, this predictability allows you to invest in a manner to mitigate the impact of interest rate changes and maintain predictable contributions.
  4. Reduction in tax liability: The money you contribute to a cash balance plan has the same effect as a tax deduction that reduces your income dollar for dollar. So if you make $500K per year and contribute $200K, you are only taxed on $300K. This represents an excellent opportunity to allow your money to grow on a tax deferred basis while reducing your current tax obligations.
  5. Nobody has to outlive their money: Unlike most 401(k) type plans, cash balance plans allow participants to receive a monthly annuity in retirement (most will take a lump sum) – this may alleviate the stress of worry about outliving your money in retirement.

As with any change to your retirement plan strategy you should consider all of the advantages and disadvantages. Contact us today to see what adding a cash balance plan to your existing plan can do for you.

Nothing in this publication should be considered tax advice.  We encourage you to consult your tax professional to see if this type of plan may serve your needs.