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This Plan Allows Doctors to Save More for Retirement

Cash balance pension plans are also more portable than traditional pension plans. Plan participants are entitled to take the balance they have accumulated in a cash balance pension plan with them when they leave the company, whether to retire or to start new employment. As a doctor and owner, if you sell the business, you are able to close the cash balance pension plan and roll your plan balance into an IRA, or possibly annuitize just like you would do with a 401(k) plan.

What are the advantages over 401(k)s?

When compared to 401(k) plans, cash balance pension plans can be advantageous on several fronts.

Since contributions are made entirely by the business, the plan offers more retirement benefits for participants. Plan contributions are also tax deductible, reducing the profits that will be taxed.

Retirement benefits are more stable in cash balance pension plans because investments usually are tied to a benchmark such as the 30-year treasury rate and are conservatively invested. Conversely, with 401(k)s, participants at retirement have only as much as their contributions have earned.

Can cash balance pension plans be combined with 401(k) plans?

The cash balance pension plan can be combined with 401(k) plans to maximize retirement savings without increasing business costs. In fact, industry reports show that 89% percent of cash balance pension plans are combined with a profit-sharing or 401(k) plan. Those who can take full advantage of both the cash balance pension plan and the 401(k) could have enough money to retire without taking excessive risks.

Cash balance pension plans ultimately help participants save more with significantly higher tax-deferred contribution limits, which could result in major tax deductions. For example, according to this estimate, a 45 – 49-year-old doctor with a 401(k) plan combined with a profit sharing plan would be maxed out with at $54,000 contribution, but by adding the cash balance plan, he/she could contribute up to an additional up to $120,000 for a total of $174,000 of tax-deferred income, resulting in savings over $78,000 (assuming a 45% tax bracket).

Cash balance pension plans may be worth a look

For medical practice owners that have excess cash flow and generate annual excess cash flow, cash balance pension plans may be worth considering. The higher contribution limits these plans can be particularly compelling for doctors looking to maximize their retirement savings, particularly in their later years.

No matter what retirement savings strategy you choose, you should work closely with a team of financial and tax advisors as well as a retirement specialist to help ensure a cash balance pension plan is the right course of action given your individual circumstances.

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Laurie E. Ingwersen is a Senior Wealth Management Advisor with The Harvest Group. She is a Certified Financial Planner™ Practitioner, CFP®, a Chartered Retirement Planning Counselor, CRPC®, and a Certified Divorce Financial Analyst, CDFA™.Laurie can be reached at laurie@myharvestgroup.com.

Important Disclosures: Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC, Headquartered at 18 Corporate Woods Blvd., Albany, NY 12211. Purshe Kaplan Sterling Investments and The Harvest Group are not affiliated companies. NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.

One comment

  1. Old news; technique been around since 2002; age discrimination risk eliminated via statute in PPA ’06. We have been terminating plans which are 10-13 years old where doctors accumulated an extra $2.6 million pre-tax at a cost of about $800,000 after-tax…..

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