The conversation surrounding retirement is usually met with uncertainty and confusion. As an employee, you consistently question how much is enough, how much do you need to save to get there, and if there are additional methods to increase your savings. As an employer, you have a multitude of options when it comes to retirement plans and finding the right one to fit your employees’ and your company’s needs can be daunting. For those looking into alternative ways of saving, a cash balance defined benefit plan might be the option you’re looking for.
A cash balance defined benefit plan offers key employees and employers a fresh perspective on retirement savings. It provides employees and business owners with an effective way to accrue greater retirement savings and gives employees more predictable benefits than with previous defined benefit plans. There are pros and cons when it comes to cash balance plans, but do you know if it’s right for you?
Why use a cash balance defined benefit plan?
In order to decide if a cash balance defined benefit plan is right for your company, it is important to understand the cash balance plan basics as well as defined benefit plan advantages.
Cash balance defined benefit plans allow employers to contribute larger amounts of funds to key employees’ retirement accounts than they could in the traditional profit sharing plans. The employee-funded account grows at a stated amount, very similar to a profit sharing plan, but the amount is guaranteed regardless market volatility.
Employees have the potential to reap huge rewards, particularly given the fact that depending on age and the design of the plan, they have may have the ability to save between $200,000 and $300,000 annually. Small business owners may choose to use a cash balance plan to “catch up” on their retirement savings. In addition, because the returns are based off interest rates, the return can be much more predictable and the plans less risky than traditional retirement plans.
While there are wealth of benefits that come with cash balance plans, it is important to understand how it can be incorporated into your company’s and your retirement needs. Cash balance plans are complex and require actuarial services, making them one of the more costly plans to set up. In addition, these plans must be viable for at least three to five years, so you must be committed to this structure.
However, many employers find that the benefits are well worth the extra work. Small business owners may look to a cash balance defined benefit plan for its ability to allow employers to contribute more than other retirement plans and thus, gain a larger tax deduction.
In general, these plans are very good for professional firms, such as medical, law, and accounting practices, where you have key employees and owners who are high-earners and desire additional tax planning strategies.
It is important to talk with your accountant, investment advisor, actuary, and retirement plan advisor to determine if a plan like this is the best fit for you.
First Western Trust’s Retirement Consulting team is well equipped to help you sort through all these difficult decisions. Named one the Top 100 Retirement Plan Advisers earlier this year by Plan Adviser Magazine, First Western won’t just help you, we’ll serve as a fiduciary and provide superior client service and advice.
It is no small task to plan for your, your employees’, or your company’s future, but with the right team of financial advisors surrounding you, the work can be made much easier.
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