Extract More From Your Retirement Plan

Greg Farber


When it comes to saving for retirement, dentists, oral surgeons, and other oral health practitioners often play catchup in the middle to the latter parts of their career.

The early years are spent acquiring an education, working in residency, and building and/or buying a practice. Student loans, insurance, and starting a family may take precedence to saving for retirement. Even more, catching up in later years can be a challenge with the current retirement savings rules.

For those who have persevered as savers, there may be a desire to reduce income taxes or save even more before they are ready to fully step away from their practice and enjoy retirement.

In either scenario, there are solutions that can provide additional tax-deferred savings while reducing some of the income tax burden. A cash balance pension plan may be an attractive option.

What Is a Cash Balance Pension Plan?

Cash balance pension plans are known as hybrid retirement plans. They have similar features to a traditional defined benefit plan (pension), but more flexibility. More specifically, the investments are professionally managed while participants have a promised benefit at retirement. The benefit is reflected as a 401(k)-like account balance that is easy for employees to understand and includes rollover and annuity options at retirement age.

Cash balance plans are gaining popularity. In 2016, the number of cash balance plans increased by 19% and total assets now surpass $1 trillion, according to Kravitz Inc, a retirement plan firm. Small and mid-size professional businesses with fewer than 100 employees represent 91% of cash balance plans, including many dental and other health-related professional practices.

What Are the Advantages?

Cash balance plans offer higher contribution limits than individual retirement accounts (IRAs) or 401(k) plans, and the contribution limits increase as beneficiaries age. Beneficiaries age 60 years and older can contribute more than $200,000 annually in pre-tax contributions under cash balance plans. The exact amounts increase incrementally with age.

Compared to the limits of 401(k) plans, which set contributions for beneficiaries who are 60 years old at $60,000 yearly, this is a huge advantage. Plan contributions also reduce adjusted gross income, potentially resulting in significant tax savings.

Additional important benefits to consider include the following:

  • There is the potential to save more than $2.5 million toward retirement.
  • Owners reap the vast majority of the benefits while providing a benefit to employees.
  • In some cases, not every employee has to participate in the plan.
  • Cash balance plans are protected under the Employee Retirement Income Security Act, also known as ERISA, and, thus, protected from creditors.

After a 3-year vesting period, accounts can be rolled into an IRA, or a lifetime annuity may be purchased.        

Who Should Consider Cash Balance Plans?

Most business owners should consider a cash balance plan. However, here are some characteristics that may help define a good fit:

  • Owners/partners who desire to contribute more than $50,000 a year to retirement accounts;
  • A professional firm with strong and consistent profits and cash flows;
  • Firms that currently contribute at least 3% to 4% to employees’ retirement plans or are open to doing so, as the contribution amount for a cash balance pension plan is generally higher than this level;
  • Owners/partners who are more than 40 years old and want to “catch up” on or accelerate their retirement savings.

Too Good to Be True?

Cash balance plans can be a viable option to accelerate savings for retirement, but they are not a “one size fits all” solution. The following are some additional factors to consider before a business establishes a cash balance plan:

  • Owners should expect to make cash balance contributions of roughly 5% to 8% for general employees. (Three percent is the typical employer contribution in a 401(k) plan.)
  • There are setup costs and annual administrative costs, as it is highly recommended that a qualified, third-party actuary be engaged to design a customized plan for the business.

While the additional money paid to employees and actuaries may sound prohibitive, these costs can be determined before creating a cash balance plan. Therefore, owners can decide upfront if the financial benefits for themselves and employees outweigh the costs.

Mr. Farber is a vice president and senior wealth advisor for Calamos Wealth Management. He also is a Certified Investment Management Analyst and an Accredited Investment Fiduciary. He has more than 20 years of experience helping successful individuals and families develop a sophisticated process for managing risk and taxes while striving to meet their present and future financial goals. For more information, email calamoswealthmanagement@calamos.com or visit calamoswealthmanagement.com.

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