Cash Balance Plan- Should I participate

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scurry12
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Cash Balance Plan- Should I participate

Post by scurry12 » Mon Jun 11, 2018 11:21 am

Hi Everyone,

I have the opportunity to participate in my group’s cash balance program and wanted to get people’s opinions about whether it is a good idea for me.

Here are some relevant details about me and the plan:

My age 37
My income: approximately 350k pretax; in 2 years as a partner, will be 600-625k pretax
My wife’s income: approximately 300k pretax
We both max out our Roth 401ks (post-tax) and separate profit sharing (pretax)
We max our HSA
We both max our Backdoor Roths
We max our 529 for our 1 child (1 year old)
Mortgage: 7k/month; 30 year fixed loan at 3.75%; on year number 2 of loan
Cash balance program details:
- Per the actuary, at my age, I can contribute up to approximately 50k pretax
- Our group has set a conservative return of 3%

Based on these figures, is it a good idea for me to participate in the cash balance program and if so, should I do the max of 50k?

Also, given the modest return of 3%, would I be better off not participating in the CBP and instead, using the money to invest in a post-tax brokerage account with the hopes of getting a better return? The tax savings through the CBP seem pretty hard to match/beat through investing in a brokerage account.

Other considerations are the following:
1. My projected 401k/profit sharing amounts may already put me in the highest tax bracket, so I may not be saving anything by using the cash balance plan
2. With the current lower income tax rates, I may be paying more taxes by using the CBP

Please share your expertise! Also, if you need any other info, please let me know.

Thanks!

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oldcomputerguy
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Re: Cash Balance Plan- Should I participate

Post by oldcomputerguy » Mon Jun 11, 2018 11:28 am

Forgive my ignorance, but what is a “cash balance plan”? I’m not familiar with the term.
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alec
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Re: Cash Balance Plan- Should I participate

Post by alec » Mon Jun 11, 2018 6:41 pm

oldcomputerguy wrote:
Mon Jun 11, 2018 11:28 am
Forgive my ignorance, but what is a “cash balance plan”? I’m not familiar with the term.
Cash Balance Pension Plans
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Tyler Aspect
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Re: Cash Balance Plan- Should I participate

Post by Tyler Aspect » Mon Jun 11, 2018 11:02 pm

The 3% guarantee of your cash balance plan is not that bad. A cash balance plan can increase your tax deferral. At your income level a traditional 401k is usually more favorable compared to a Roth 401k.
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ccf
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Re: Cash Balance Plan- Should I participate

Post by ccf » Tue Jun 12, 2018 7:18 am

scurry12 wrote:
Mon Jun 11, 2018 11:21 am
Our group has set a conservative return of 3%
Are you sure that the return will be fixed at 3%?

I may be remembering incorrectly but I think that cash balance plans often have a floor/guaranteed return of 3%. I'd find out how it is actually invested.

Raabe34
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Re: Cash Balance Plan- Should I participate

Post by Raabe34 » Tue Jun 12, 2018 8:09 am

I'm not sure you truly understand the cash balance and what the 3% means. The # only really matters in the actuarial calc and is probably somewhat indicative of how unaggressive the rest of the folks are invested. You should be able to open an account in the plans name and signature by a trustee and from there invest it how you see fit. That would allow for large tax deferral.

The conclusion you should come to is that it's very much worth participating.

Grt2bOutdoors
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Re: Cash Balance Plan- Should I participate

Post by Grt2bOutdoors » Tue Jun 12, 2018 8:16 am

Umm, heck yes you should participate! You will be able to defer up to $50K from top tax rates today. Yes, you're making only $350K, but when your income bumps up you will feel it in your taxes withheld section of paycheck. Do it! A conservative rate of 3% indicates they are using the 10 year Treasury note as the proxy return. Super conservative, AAA US Treasuries.
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jacoavlu
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Re: Cash Balance Plan- Should I participate

Post by jacoavlu » Tue Jun 12, 2018 8:39 am

Raabe34 wrote:
Tue Jun 12, 2018 8:09 am
I'm not sure you truly understand the cash balance and what the 3% means. The # only really matters in the actuarial calc and is probably somewhat indicative of how unaggressive the rest of the folks are invested. You should be able to open an account in the plans name and signature by a trustee and from there invest it how you see fit. That would allow for large tax deferral.

The conclusion you should come to is that it's very much worth participating.
Cash balance plans are invested as a pool for the whole group. You can’t choose your own investments like a 401k.

A conservative number is chosen because investment returns do not meet the number specified, the group has to make up the difference through larger contributions (which everyone may not want). You can see where this could go bad if invested aggressively. Especially for older participants, who typically have larger contributions and may be looking to retire.

Raabe34
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Re: Cash Balance Plan- Should I participate

Post by Raabe34 » Tue Jun 12, 2018 9:09 am

Just like you can have multiple vendors inside a 401k you can have multiple vendors inside a CB.

All the same risks apply. I'm guessing he's structured slightly differently than you think because he would have his "own" 50k contribution vs the company one.

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