This podcast discusses cash balance plans, a type of retirement account that combines elements of defined contribution plans and defined benefit plans. They explore who should consider a cash balance plan, the tax benefits, managing losses in the account, and the availability of automatic emergency braking in vehicles. Guest speaker Dr. Victor Mangona provides expertise on these plans and how to get your practice to adopt one.
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Quick takeaways
Cash balance plans offer high-income professionals, including doctors, a hybrid retirement account that combines aspects of a pension and a 401k, providing additional savings beyond 401k contributions.
Cash balance plans are advantageous for doctors and other high-income professionals in high tax brackets, as they offer significant tax savings and can help individuals reach their retirement goals more quickly.
Cash balance plans can be customized based on factors such as employee participation, income levels, and demographic considerations, with contributions determined by a flat dollar amount or a percentage of income, and can be closed after 5-10 years, with funds rolled over into a 401k or IRA, providing ample tax benefits and asset protection.
Deep dives
Cash Balance Plans Overview
Cash balance plans are a type of defined benefit plan that offers a hybrid between a pension and a 401k. They allow high-income professionals, including doctors, to save additional money beyond their 401k contributions. Cash balance plans are particularly beneficial for those in high tax brackets, as they provide significant tax savings. While they are often associated with older doctors, they can also be advantageous for younger physicians looking to maximize their retirement savings. These plans offer great asset protection and can be closed within 5 to 10 years, allowing the funds to be rolled over into a traditional IRA or another pre-tax account.
Who Should Consider Cash Balance Plans
Cash balance plans are suitable for doctors and other high-income professionals who have extra money to invest beyond their 401k contributions. They are especially beneficial for individuals in high tax brackets or those seeking early financial independence. Even younger doctors in their 30s can benefit from cash balance plans if they are able to save more than what their 401k allows. These plans provide an opportunity for significant tax savings and can help individuals reach their retirement goals more quickly.
Design and Considerations
Cash balance plans can be customized and designed based on specific factors, including the number of employees participating, income levels, and demographic considerations. Contributions can be determined based on a flat dollar amount or a percentage of income. Non-discrimination testing must be done to ensure that contributions to non-highly compensated employees are fair, typically involving a minimum contribution of 5% for these employees. Closing a cash balance plan can be done after 5-10 years, and the funds can be rolled over into a 401k or IRA. These plans offer significant tax benefits, high contribution limits, and asset protection for participants.
Tax Savings and Risk Mitigation in Cash Balance Plans
Cash balance plans offer tax savings and risk mitigation for high-income professionals. By investing in a cash balance plan, individuals can take advantage of market-based crediting, which allows variable credits based on investment returns. This reduces the risk to the company and provides a fair and flexible retirement plan. In the event of a bear market, partners can put more money into the plan, buying low and increasing their retirement savings. While some doctors may have cash flow concerns, the overall risk of cash balance plans is overblown. Educating individuals on the amount they need to save and understanding the benefits of these plans can encourage more participation.
Maximizing Tax Savings and Investing Strategy
Cash balance plans provide permanent tax savings due to bypassing payroll taxes. For high-income professionals paying high marginal tax rates, this savings is significant and hard to beat with other investments. While individuals may want to invest in more aggressive ventures like real estate or Bitcoin, the tax savings and risk-adjusted returns of cash balance plans often outweigh the potential gains from other investments. Cash balance plans can be strategically incorporated into an overall investment portfolio, offering diversification and tax advantages. By maximizing cash balance contributions, individuals can enhance their overall compound annual growth rate and increase their retirement savings.
A defined benefit cash balance plan https://www.whitecoatinvestor.com/cash-balance-plans-another-retirement-plan-for-professionals/ is a somewhat unusual and surprisingly physician specific retirement account. It is a type of a defined benefit plan. On one end you have a defined contribution plan like a 401(k) and on the other a defined benefit plan or pension plan. A cash balance pension, a subtype of defined benefit plan lies as kind of a hybrid between the two. It still falls in the category as a defined benefit plan, but it's purpose is designed not so that you have an annual income distribution after you retire but that you take the lump sum. Confused? Don't worry, we have Victor Mangona, who has developed an expertise in these plans, as our guest this episode. We discuss who should consider a cash balance plan, how much money can be put into a plan, the tax savings from using this plan, how to invest these assets, what happens if there is a loss in the account, and most importantly how to get your practice to adopt a cash balance plan so you can take advantage of these great accounts.
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