RETIREMENT SAVINGS
“... like any qualified retirement plan, assets are protected from creditors. And by greatly adding to retirement savings, cash balance plans help you to be better prepared for succession planning.”
contributions and interest credited each year at a stated rate of interest. Retirement benefits are generally paid out as a lump sum payment of the hypothetical account balance and are eligible for rollover, but they can also be paid in the form of a monthly benefit as defined in the plan document.
Cash balance plans are less confusing to participants because the hypothetical account appears to be a real account balance, and are generally more valued by younger workers due to its portability.
WHY CONSIDER A CASH BALANCE PLAN? Cash balance plans, either alone or in combination with your existing 401( k) plan, give you the opportunity to shelter a substantially larger amount of your profits in a very tax efficient fashion. Because cash balance plan limits are stated in terms of annual benefits at normal retirement age rather than in deductible contribution amounts, older participants( in their mid-40s and up) can accumulate significantly larger account balances compared to those in a DC plan in a relatively short period of time. The current low interest rate environment tends to increase the contribution required due to the effect of a low interest rate in the actuarial calculations.
In addition, like any qualified retirement plan, assets are protected from creditors. And by greatly adding to retirement savings, cash balance plans help you to be better prepared for succession planning.
WHO IS A GOOD CASH BALANCE PLAN CANDIDATE? Cash balance plans are NOT for everyone.
Benefit levels are set high to generate large, mandatory, tax-deductible contributions( usually from $ 100,000 to $ 200,000, or more) and as an employer, you take on the risk of ensuring that these promised benefits are funded, regardless of the investment performance of plan assets. Potential candidates for these plans include the following:
1. Companies that have established strong and stable cash flow and profitability patterns
2. Professional firms or entrepreneurs who may have neglected personal retirement savings while building their practices or companies, who are now older, who have a company with the financial characteristics stated above, and who now have a need to catch up on years of savings
3. Employers who have employee demographic characteristics that include:
i. A low ratio of rank-and-file employees to owners / highly compensated employees
ii. A large age gap between employees and owners, with employees being younger than owners
4. Companies who are already contributing amounts to employees in the range of 3 %– 4 % of pay. While cash balance plans are designed to benefit highly compensated employees / owners, they normally provide minimum contributions to other employees in the range of 5 %– 7.5 % of pay in either the cash balance plan or a separate 401( k) profit sharing plan.
HOW DO I LEARN MORE
ABOUT THESE PLANS? Cash balance plans can take a month or more to set up, and they are more expensive to establish and maintain than a 401( k) plan. In the right circumstances, however, these plans can provide exceptional tax efficiency while significantly enhancing the retirement readiness of business owners and their select highly compensated employees. If you have questions on this article or are interested in learning more about cash balance plans, please contact Marci Boyarski at Wipfli LLP. +
BY: MARCI BOYARSKI CPA, SENIOR MANAGER, WIPFLI, LLP
Marci Boyarski, CPA | Senior Manager | Wipfli LLP | Office: 715.858.6672 | Fax: 715.832.0475 | 3703 Oakwood Hills Parkway, Eau Claire, WI 54701
1 Approximate amount necessary to generate the 2016 annual benefit limit under IRC § 415 of $ 210,000 per year.
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