The Ultimate Guide To Cash Balance Plans
As an employer, you have many things on your plate. Hiring the right people, reaching your company’s financial goals, marketing and promoting your brand, and ensuring that your company is profitable and running smoothly.
These items are just a few of the many concerns that plague business owners and entrepreneurs. If you’re the owner of a business, chances are your mind is filled with the above and more. And, chances are, you don’t have much time to think about things like your retirement, let alone the tools you’re going to use to save for your future.
If reading that paragraph made your palms sweat with nervousness, that’s okay!
We understand that business owners have a lot on their minds.
We also understand that the retirement needs of an entrepreneur and business owner are going to be vastly different from the retirement needs of an employee. In fact: most entrepreneurs (34% — yikes!) don’t have a retirement plan.
We’re here to help!
Today we’re going to talk about Cash Balance retirement plans and why they might be the right choice for your employees.
What Is A Cash Balance Plan?
A cash balance plan is a retirement vehicle that allows an employer to credit an employee’s
account with a percentage of that employee’s annual salary, plus interest.
This type of retirement plan falls under the category “defined benefit plan.” This means that the funding requirements, limits, and investment risks are all based on defined benefits requirements. This type of retirement account is labeled “defined” because the employer’s contribution is calculated using a formula ahead of time. So, when an employee signs up, the amount an employer will contribute has already been determined.
Defined benefit plans differ from other retirement vehicles, because the employer makes all investment decisions — therefore, the employer assumes all of the investment risks.
Cash Balance Plans vs Traditional Pension Plans
Although most pension plans fall under the category of “defined benefit”plans, cash balance plans are appealing in a few different ways.
For example: a business pays into a cash balance account yearly in order to fund a payout for its employees. These payouts are either paid out as a lump-sum payment or as a lifetime annuity, and are calculate by the plan administrator.
Each participant receives a statement disclosing the amount they will be paid out, and all amounts are held and pooled into one account. The pooling of assets are one aspect where cash balance plans differ from individual retirement plans, in which assets belong to individual workers.
The Downside to Cash Balance Plans
Unfortunately for workers, cash balance plans promise a more modest growth rate than traditional retirement vehicles, although in some cases these plans may promise a variable or a fixed rate of growth.
The reason for these modest growth rates has to do with the fact that the businesses are responsible for managing the portfolio’s assets. A modest growth rate offsets any risk for underperformance the portfolio may incur.
Also unlike traditional pension plans, cash balance plans come with a portability feature. If an employee leaves their company before retirement age, he or she can take their accumulated cash balance with them. This money can then be used to fund another retirement account, making cash balance plans an ideal choice for younger employees, who may jump from career to career.
Cash balance plans give employees a defined benefit plan with a portable option and provide employers more flexibility on contributions. Business owners may find an added benefit with cash balance plans, as they can reduce his or her tax liability through cash balance plans.
Cash Balance Plans and Tax Reduction
Remember when we said employers get to define what they contribute to their employer’s retirement accounts? This has an added benefit to employers, because they have the opportunity to qualify for lower tax brackets by funding their employee’s plans.
If employers satisfy a defined lump-sum requirement for plan funding, they have the ability to drastically reduce corporate and personal taxes, depending on the set up of his or her business.
A cash balance plan typically guarantees an annual return of 4% on the mandatory annual contributions. This return is compounded over 30 years for the youngest employee participants, meaning company owners can enjoy significant tax breaks. These accounts work best for small businesses, who have 20 employees or less, and who experience profits of more than $50,000 annually that can be placed into funding a pension.
This allows business owners to legally defer paying taxes on large sums of income, which are used to fund retirement, as any funds that are placed into the cash balance plans are tax-deductible. As an added bonus: this money will be used to fund the retirement of employers as well. Of course, taxes will have to paid on the money once it’s used for retirement, but by then, most retirees will be in a lower tax bracket.
Turbo Charged 401k + Cash Balance Retirement Savings
As an added perk: cash balance plans allow business owners to turbo-charge their retirement savings plans in combination with a 401k plan.
Because running a business requires so much effort and so many resources so business owners let their retirement savings fall to the wayside, in favor of funneling extra money into their businesses. Cash balance plans provide an outlet for owners to funnel money into their employee’s retirement funds, as well as their own combining it with their current 401k Plan.
Let’s recap: cash balance plans are excellent choices for owners of small businesses for a multitude of reasons.
– Security. These plans guarantee a targeted annual benefit, funded by the business.
– Employee attraction. Cash benefit plans attract employees, because they offer secure, defined benefit plans with a portable possibility.
– All businesses can utilize this type of plan. It is an excellent choice for professional firms, family businesses, and small businesses, as well as larger companies.
– Employers can experience a tax break. Business owners can potentially experience a significant tax break while saving for retirement.
A cash balance plan is an effective way to provide a stable retirement plan for employees and business owners alike. If you have questions about whether a cash balance plan is right for you, contact one of our advisors today or read the blog! We have provided a list of retirement resources for business owners and employees alike, to help super charge your retirement saving and funneling money back to your company.
For more information on what other type of retirement plans may work for your company.
Take look at your options: https://www.storickgroup.com/401k-pricing/company-401k-plan/