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What a Cash Balance Plan Is And How It Works
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Cash balance plans are defined benefit pension plans, where your retirement income is based on the amount of money you contribute and earn from your own investments. It is not based on how much time you’ve worked for your employer or been invested in private sector pension plans.
They are considered an improvement over traditional pension plans because they offer employees more control and flexibility over their funds than most traditional pension systems.
A cash balance plan offers many pros and cons. However, not all companies offer this type of pension scheme.
What Are Cash Balance Plans?
Cash balance plans are a versatile type of defined contribution plan. With it, you can invest your money in various mutual funds and other investments, as well as fixed-income options like money market funds or variable rate options. Usually set up like an IRA, these plans are not considered taxable income as per the internal revenue code until you start withdrawing the money.
You can start contributing to a cash balance plan immediately after becoming eligible for benefits at work. That’s even if you’re not yet employed by the company sponsoring the program.
Cash Balance Plans Pros and Cons
A cash balance plan is a simple way to increase retirement savings on a tax deferred basis. They’re a type of defined benefit plan, sometimes called hybrid plans. While there are great benefits with most cash balance plans, some downsides come with them.
When you earn money in a cash balance plan, you don’t pay any taxes until you withdraw either in a lump sum distribution or in increments at retirement.
If you don’t take out any withdrawals until retirement, your account will earn a guaranteed interest crediting rate, usually around 3-6%.
It’s easy to understand and simple to set up and implement. However, several people seek assistance from trusted asset protection lawyers for more sound decisions.
It’s easy to track company finances and ensure you stay within budget.
Combining a cash balance plan and 401(K) profit sharing plan will increase savings.
You must wait until retirement age to receive the promised benefit from your account.
Your employee’s retirement account balance will lose interest if plan investments don’t perform well in any given year.
Amounts in the plan are not backed by a pension benefit guaranty corporation.
Cash Balance Retirement Plans
Cash balance retirement plans are one of the most common traditional defined benefit plans. Employers who offer this pension plan can choose how much they contribute, but they must make at least some contribution to receive the tax advantages.
There are two types of cash balance pension plans, a defined benefit plan, and a defined contribution plan.
A defined benefit plan will pay you a certain amount each year you work for the company and participate in the plan. This amount varies depending on your retirement age, salary, the Internal Revenue Service, and other factors.
A defined contribution plan entails the employer making an employer contribution credit of a certain amount of money for each year you work for them and participate in the plan. You can also add money to increase your savings and actual gains on those funds.
How Often Must Cash Balance Plans Be Evaluated?
You can typically evaluate a cash balance plan annually. However, some cases will require you to evaluate your cash balance plan as often as needed. If you have a high-turnover workforce, or if employees frequently change jobs, it may be necessary to evaluate the plan more often than every year. Frequent evaluations will help you avoid any investment risk.
If changes are made in the plan’s design, such as new benefits or the plan sponsor offers a different contribution rate, you might want to reevaluate the plan.
Get Help With Your Cash Balance Plans
A cash balance plan is a simple and profitable way for businesses to offer retirement benefits to their employees. They’re also suitable for individuals who want more control over their accelerated retirement savings and investments. However, a cash balance plan can be confusing since they’re not as common as other retirement plans like a 401(K) plan, profit-sharing plans, or a traditional pension plan.
Are you looking for more information about how cash balance contributions work or whether they might suit your business or yourself? The Law Office of Paul Black has experienced professionals ready and waiting to answer any questions about cash balance plan participants, including employer contributions, tax savings, qualified retirement plans, and traditionally defined benefit plans.
Call us today at (404) 347-8727 or contact us online to schedule a consultation.