A cash balance plan is a retirement plan that offers you some of the benefits of traditional pension plans and defined contribution plans. This type of retirement account provides you with the opportunity to save up money for your future while also providing you with tax-deferred growth on your investments. What are the benefits of cash balance plans? Read on to find out.
Maximum Contribution Allowance is Higher
Under a cash balance plan, participants can contribute more money into their retirement accounts compared to most other types of defined contribution plans. This is because the Internal Revenue Service (IRS) sets an annual limit on how much you can contribute to your 401(k), 403(b), or 457 accounts.
However, the IRS does not limit how much you can contribute to a cash balance plan. Thus, employees are allowed to save up more money for their retirement.
Guaranteed Benefits at Retirement
While your employer is not required to provide you with any retirement benefits in a cash balance plan, many employers choose to give the participants both guaranteed and optional benefits.
Guaranteed benefits are defined as the benefit that is owed to the participant at retirement. If an employer offers this option, participants can rely on receiving these guaranteed benefits when they retire. Furthermore, employers can choose to provide participants with optional benefits as well.
Since a cash balance plan is very similar to a traditional pension plan, it provides its employees with guaranteed benefits. With this type of retirement account, you are not only building up funds in your 401(k) account; you are also ensuring that your contributions will be paid out when you retire.
Provides Tax Deferral
Cash balance plans are similar to IRA accounts in that they provide you with the opportunity for tax-deferred growth on your investments. However, cash balance plans offer more flexibility than traditional IRAs because you can make contributions at any time. For example, you can contribute to your cash balance plan in between paychecks if you wish to do so.
Provides Investment Choice
Cash balance plans allow participants to choose how to invest their funds and provide employees with access to a broad range of investment options.
Not all employers that offer defined contribution plans allow participants to choose which investments they prefer to make. However, cash balance plans allow employees to choose from a wide variety of funds, which means that you can select the best investment choices for your future.
In short, a cash balance plan is an easy way to save for the future, and many benefits come from this type of retirement account.