Cash Balance vs. 401(k) Considerations for Business Owners
If you are an owner or partner looking for larger tax deductions and accelerated retirement savings that aren’t available under a 401(k) plan, a cash balance pension plan may be the perfect solution.
The cash balance plan allows employers to control how much to save for an employee’s retirement, as opposed to 401(k) plans which allow employees to determine the amount they as an individual contribute each year.
In the same class as 401(k) and traditional pension plans, a cash balance plan is a “qualified” retirement plan. This means it qualifies for tax deferral and creditor protection under ERISA (the Employee Retirement Income Security Act). The Pension Protection Act of 2006 encourages professionals and successful business owners to adopt this type of plan.
In a cash balance plan, each participant has an account. The accounts grow annually based on contributions as well as interest credit, which is guaranteed rather than being dependent on the plan’s investment performance.
Cash balance plans are defined by a precise percentage of one’s salary, including a set interest rate that is applied to the balance. If an employee leaves the company before retirement age, they can take the contents of the cash balance plan as a lump sum and convert it into an IRA.
These are heavy considerations with a long-lasting financial impact. The trusted and knowledgeable consultants at Odyssey Advisors are here to help you make the best financial decisions. Contact us to help guide your decision-making strategy for cash balance versus 401(k) plans.