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  • Writer's pictureSamantha Diggs

6 Things You May Not Know About Cash Balance Plans

Updated: Mar 11, 2022

When it comes to deciding on a retirement plan, there are many choices, yet, one plan that is increasing in popularity is the cash balance plan. Compared to traditional 401(k) retirement plans, cash balance plans come with a twist and numerous benefits that you may not have been aware of. In this week's blog, let's take a look at the six things you may not know about cash balance plans.

1. Significant Tax Benefits

Cash balance plans can bring tax benefits to the company. When an employer makes a contribution to an employee's account it can be claimed as a deduction during tax season. The contribution is also tax-deferred for the employee until retirement, at which point the income earned could be taxed at a much lower income tax rate.

2. Can Combine with Other Plans

One of the major advantages of cash balance plans is its ability to be combined with a company's existing 401(k) plan; this allows plan participants to generate a larger amount of retirement savings.

3. Tailor for Individual Needs

Cash balance plans are flexible and can be tailored to accommodate the needs of various employees. By taking factors such as age and income into consideration, the calculations and estimations are made with the assistance of actuaries.

4. Higher Maximum Contribution Balance

Cash balance plans allow participants to accumulate significantly higher amounts than can be accumulated in traditional defined contribution plans. The same goes for employers, with cash balance plans the employers are able to make greater contributions to retirement savings—which can make a big difference if larger deposits are needed to prepare for retirement. Additionally, the contribution limits become less restrictive as the employer ages.

5. Seal of Approval from the IRS

Cash balance plans are IRS approved and have been supported as a viable retirement plan since 2006. For many, this solidifies their place among pension plan options.

6. More Portable

Cash balance plans can be distributed or rolled over to an IRA or another employer-sponsored plan once separated from service. This makes cash balance plans portable like other qualified retirement plans which is appealing to participants.

Cash balance plans offer a list of significant benefits while also allowing for cost savings and flexibility along the way. However, with great benefits come complicated rules and regulations that both employers and participants should be informed of. When deciding on your retirement plan, it is important to understand every aspect of the plan. Should you have any questions about choosing the right retirement plan, our team at RPCSI is here to help.

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