This letter is part of a series on cash balance retirement plans, one of the best strategies to help high-earning Americans reduce taxes and accelerate their retirement savings. Since the loosening of IRS restrictions in recent years, cash balance plans have become extremely popular and only continue to grow, commanding over $1 trillion in assets. Adding a cash balance plan on top of a 401(k) profit-sharing plan can generate hundreds of thousands of dollars in annual tax savings. People learning about cash balance plans for the first time commonly ask something along the lines of “If cash balance plans are so great, why haven’t I heard about them before?” It’s a great question, since the relative anonymity of cash balance plans seems strange when compared to their amazing benefits. This question has a few different answers. First, in the past, the legal status of cash balance plans was relatively uncertain. Before 2006, financial advisors weren’t sure if cash balance plans would be legally recognized and were leery about recommending them. But the Pension Protection Act of 2006, accompanied by later IRS regulations in 2010 and 2014 (which we’ll discuss in later articles), confirmed and clarified the legal status of cash balance plans. Second, many potential adopters of cash balance plans tend to be intimidated by the set-up process. Setting up a 401(k) or an IRA can be as simple as a quick appointment with a financial advisor or HR rep. Setting up a cash balance plan, though, takes more coordination and has to follow specific rules. Some Americans earning less than $300,000 per year think that the steps involved with set-up just aren’t worth it—and they may sometimes be right. For Americans earning over $400,000 annually though, looking into setting up a cash balance plan should be a definite priority. The immense potential tax savings are well worth the extra set-up. Companies that specialize in cash balance plans will even take care of all of the hassle, developing cash balance plan proposals and funding options free of charge. The bottom line: cash balance plans are one of the best tax-crushing options in America, and they are becoming better known every day as more and more people take advantage of the benefits they have to offer. For wealthy Americans, cash balance plans are well-worth a closer look.
My name is Dan Hopwood and I first started my career in the insurance business back in 1988. 2023 will be the start of my 35th year in the business.