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Cash Balance Plans Gain Traction as Hybrid Retirement Strategy

Cash balance plans are a hybrid retirement strategy gaining traction. They allow high contributions, tax advantages, and asset protection, making them attractive for firms with high-earning employees.

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1 min read
In the image we can see there is a poster in which people are standing and holding bags in their...
In the image we can see there is a poster in which people are standing and holding bags in their hand. There are three master cards and beside there is a chapter plan sheet.

Cash Balance Plans Gain Traction as Hybrid Retirement Strategy

Cash balance plans, a hybrid retirement strategy combining defined benefit and defined contribution aspects, are gaining traction among businesses. These plans, originating in the late 20th century in the US, offer high contribution limits and tax advantages, making them ideal for firms with high-earning owners and key employees.

Cash balance plans are particularly efficient when layered onto existing retirement programs with profit-sharing contributions of 3% or more. They allow for significantly higher contributions than traditional 401(k) or profit-sharing plans, often exceeding $250,000 per year for older, high-earning participants. This makes them an attractive option for firms seeking to attract, retain, and reward key employees.

These plans are flexible and can be implemented by firms of any size. They work best when more key employees are involved and their desired contributions rise. Upon retirement or job departure, the account balance can be rolled over into an IRA or another qualified plan. Contributions are tax-deductible, grow tax-deferred, and can significantly reduce corporate or personal tax liability. Additionally, these plans help protect assets from lawsuits and creditors.

Cash balance plans require an actuary for annual funding calculations, minimum participation rules, and nondiscrimination testing. They are particularly beneficial for firms where owners and key employees earn $500,000 or more annually, as they allow contributions beyond 401(k) limits.

In conclusion, cash balance plans offer a compelling retirement strategy for businesses of all types. They provide high contribution limits, tax advantages, and asset protection, making them an attractive option for firms with high-earning owners and key employees. However, they require professional management and oversight to ensure compliance with regulations and best practices.

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