The plan specifies a contribution to be credited each year and the interest to be credited based on those contributions. Contributions to the plan can be either a percentage of compensation or a flat dollar amount, subject to the IRS maximum contribution limits. Interest credited to the plan reflects actual investment performance of underlying plan assets but are subject to IRS limitations.
Let’s see what are some of the cash balance pros. Like a traditional defined benefit plan, a cash balance plan provides a future benefit amount at retirement. Similar to a defined contribution plan, but unlike traditional pension plans, the promised future benefit is shown as a separate account balance which can then become a monthly pension benefit or a lump sum payout at retirement. Typically, lump sum distributions are available upon termination, death, retirement or attainment of age 62 even if still actively employed.
Who Should Consider A Cash Balance Plan?
Cash balance plans are ideal for business owners that desire to contribute beyond the limits applicable to traditional defined contribution plans. A cash balance plan can replace an existing defined benefit plan or be added to an existing defined contribution plan. These plans may be particularly useful for small business owners who want to accumulate a significant amount of retirement savings in a short period of time.
For example, if the business owner needs to accumulate over $50,000 per year (the 2017 annual limit for defined contribution plans) has a steady cash flow, and is already providing a 401k benefit, a cash balance plan may be the solution. Depending on the situation, the owner may be able to contribute up to $200,000 per year. By doing this the business owner can maximize contributions to both plans.
A cash balance plan can be a powerful tool on its own, or it can be leveraged with an existing defined contribution plan. Business owners that wish to save more annually for their retirement can significantly accelerate their retirement savings. Ultimately, helping them maximize something that matters most of all, their peace of mind.