Understanding Your Retirement Options

Many of us have heard about starting a 401k for our business and its employees. However, have you heard about cash balance plans? Cash balance plans are like a traditional defined benefit pension with a 401k twist. As in a traditional pension plan, investments are professionally managed and participants are promised a certain benefit at retirement. But the promised benefit is stated as a 401k style account balance, rather than a monthly income.

Those currently relying on 401k’s may find that the addition of a cash balance plan slashed their tax bills and can help add to your a sagging nest egg. Many older business owners are turning to these plans to help increase their retirement savings. Cash balance plans have generous contribution limits that increase with age. For example, people 60 and older can sock away well over $200,000 annual in pre-tax contributions. Business owners should expect to make cash balance contributions for typical employees to roughly 5% to 8% of pay and participants accounts receive an annual “interest credit” which may be a fixed rate, such as 5%, or a variable rate, such as the 30 year treasury. At retirement, the funds can be drawn as an annuity based upon the balance or a plan can offer a lump sum, which can be rolled to an IRA or another employer plan. These plans are more costly to administer than a typical 401k. However, for many business owners, the tax advantages that come with plowing six-figure annual contributions into the plans may outweigh such costs.