What Is A Cash Balance Plan? The Ultimate Retirement Strategy


so today we're gonna talk about what a

cash balance plan actually is cash

balance plans are used for business

owners in a variety of situations but

primarily it's for a business owner that

wants to make a large contribution into

a plan

most everybody have heard of IRAs

obviously you can only put a small

amount fifty five hundred into an IRA

401ks you can do eighteen five plus a

profit-sharing so again nice amounts

that you can put in but for business

owners that want to put a hundred

thousand dollars or whatnot into a plan

it's just not going to work for you with

an IRA or a solo 401k so a cash balance

plan is going to be usually the number

one option for that type of person but

to take a step back what we would

typically look to when I try to explain

what a cash balance plan is is we would

look at the difference between what we

would call a defined contribution plan

and a defined benefit plan now a defined

contribution plan defines how much money

you put into the plan itself whereas

find benefit defines the amount that

comes out of the plan at a later date

IRA s and 401ks are essentially defining

the contribution upfront that is tax

deductible whereas for folks the good

analogy for them is to compare it to

Social Security where work your whole

life and at a retirement age you're able

to take out a certain amount of

contribution excuse me

monthly retirement benefit that you're

gonna get to take out for the rest of

your life that would be a perfect

example of what a defined benefit plan

is so a cash balance plan is in the

defined benefit camp it's technically

that type of plan they do call it a

hybrid plan because it actually states

those benefits as a cash amount as a

hypothetical account balance but it

really is an actuarial calculation

that's based on a future benefit that's

going to come out of the plan itself now

the plan is funded by an annual

contribution by the company itself but


grows based on an interest credit that

is allocated to the plan in addition to

any funding that the company makes so

it's going to grow over time until at

some point it would be annuitized or

rolled out into an IRA one of the

important advantages of cash balance

plans though is they're only going to be

for qualified employees in many

situations you're going to have

full-time employees they're gonna be

working greater than a thousand hours a

year or employees that are going to be

under the age of 21 for anybody who's

under the age of 21 you do not have to

contribute into the plan for them

anybody who works less than a thousand

hours does not have to receive a benefit

under the plan so it's really going to

be skewed towards a lot of the full-time

employees and owners of the company for

that reason a cash balance plan is going

to be a great option for folks who want

to get a large amount of money into a

plan and want to make sure they can

supercharge their retirement and also

take advantage of the tax deductions as