Cash Balance Plan: Why Age and Income Matter So Much

Age and income in a cash balance plan: higher pay doesn't automatically mean more can go in, and no age or income level makes it the right fit. Age and income help explain the numbers, but they don't decide the fit on their own. Episode 10 of Cash Balance Plans 101 from Emparion. Learn more: https://www.emparion.com/?utm_source=... Why age and income matter, in short. In a 401(k), the law limits what can go into your account each year. In a defined benefit plan, like a cash balance plan, the law's main limit is on each person's yearly benefit in retirement. So age means time to get there. Income means pay for plan purposes, up to a point. And plan design and any employees play a part. Module 3 covers how much can actually go in. Made for business owners, physicians, dentists, attorneys and other professionals. CPAs and financial advisors: feel free to share this series with clients who ask about cash balance plans. In this video: 0:00 Welcome back: start with the benefit 0:35 Why age matters: think of age as time 0:55 The law's main limit: on the yearly benefit in retirement 1:40 Why income matters: pay for plan purposes 2:09 Business income and any employees 2:27 Why two owners can see very different numbers 2:47 Recap of age, income and plan design 2:59 Key message: age and income don't decide the fit on their own 3:29 Module 3, and what's next Questions answered in this video: Why do age and income matter so much in a cash balance plan? They help explain the numbers. Age is one of the factors in the actuary's yearly calculation, and pay credits are often based on pay. Why does age matter? Think of age as time: the years left until the plan's retirement age. To reach the same benefit in fewer years, pay credits generally need to be larger. With more years, smaller pay credits can get there, with help from interest credits. What if an owner has fewer years to go? For some owners, the plan's design may allow larger pay credits and yearly contributions, within the limits. But the benefit limit can be lower for someone with only a short time in the plan. Other rules apply too, like fairness rules and deduction limits. Are more or fewer years better? More or fewer years can change the yearly amounts. Neither is automatically better. What does income mean in this video? Pay for plan purposes, not always everything the business earns. And there's a limit on how much pay can count. How is the benefit limit tied to pay? It is tied to a person's average pay over their highest-paid years in a row. A dollar amount set by law plays a part too, and it can change over time. Why does business income matter? As we saw in Video 7, steady income helps a business count on making the yearly contribution. What if there are employees? The plan has to be fair to them under the rules. So the team's ages and pay can shape the design and the cost. Why can two owners see very different numbers? Their years to go, pay, teams, plan designs and investment results can all differ. And each year, the actuary updates the numbers, so the range can change. Is there an age or income level that makes a cash balance plan the right fit? No. The right fit depends on the business. Finding it takes a proper analysis with specialists, like a plan administrator, an actuary and your own tax advisor. Cash Balance Plans 101 | Module 2: Who It's For Module 2 playlist:    • Cash Balance Plans 101 | Module 2: Who It'...   New to the series? Module 1 playlist:    • Cash Balance Plans 101 | Module 1: The Basics   Episode 7: Cash Balance Plan for Business Owners: Who Is the Ideal Candidate?    • Cash Balance Plan for Business Owners: Who...   Episode 9: Maxed Out 401(k)? Why Some Owners Look at a Cash Balance Plan    • Maxed Out 401(k)? Why Some Owners Look at ...   Episode 10: Cash Balance Plan: Why Age and Income Matter So Much (this video) Next: Episode 11, When a Cash Balance Plan May Not Be a Good Fit    • When a Cash Balance Plan May Not Be a Good...   Learn more, or see whether a cash balance plan might be right for your business: https://www.emparion.com/?utm_source=... About Emparion Emparion is a third-party administrator (TPA) that specializes in cash balance plans and defined benefit plans, and we help business owners design and run their plans. Emparion is a TPA, not the investment custodian. We do not hold or invest plan money. Disclosures This video is general education, not tax, legal or investment advice. Any examples and visuals are illustrative only. How a specific plan works depends on its plan document, and tax results depend on your own situation, so talk with your own tax, legal and financial advisors before making decisions. #CashBalancePlan #DefinedBenefitPlan #RetirementPlanning