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Should I max out cash balance plan?

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  • Should I max out cash balance plan?

    I am trying to determine if there is any down side to maxing out my groups cash balance plan. I’m 37 and me and my wife are maxing out all retirement accounts and putting 50k into my groups cash balance plan. Student loans are refinanced around 2% and will be paid off in 3 years at current rate. My group just increased the cash balance plan max contribution to 150k and I anticipate making an additional 100k starting next year. If I didn’t put this additional income into the cash balance plan I assume I would take home around 50k after taxes which could go toward student loans, taxable investment account or real estate. The cash balance is invested in vanguard passive index funds, and the plan would be to close the plan every 7-10 years and restart it. As far as I can tell going with maxing out the cash balance plan would be the best use of the extra income, but I am wondering if there are any downsides I am not appreciating. Any and all input/ guidance is greatly appreciated.

  • #2
    If you have the cash flow to contribute, then it is usually a good idea. Note one danger-if the plan closes at a time that it is underfunded-the lower paid non highly compensated employees must be made "whole" to their expected amounts (usually contributions plus 5% appreciation per year). Shortfalls come out of highly compensated accounts.

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    • #3
      At 37, I would have put in the max. That said, it was nice paying off loans and having a sizeable taxable.

      Also, I'm a little nervous when the majority vote is in charge of my personal money, specifically deciding when/why to close the plan...you could theoretically be stuck with 7 figures of money invested in T bills. That may or may not be an issue, depending on your overall portfolio.

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      • #4
        I have no advice. Just jealous as a an EM/CCM doc that you’re in this situation.

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        • #5
          Depends on your desired asset allocation. Assuming you're maxing out your 401k ($58k), then this would be $150k in a conservative investment for close to a decade. Not sure on spouse's situation, but if you're getting $30k in their 401k plus Roth's ($11k), you have $250k in retirement contributions, of which $150k is conservatively invested for 10 years. I'd probably still do it for the tax savings and that the plan will close every so often, so you can get more control of the funds at certain intervals. But realize this when you see stocks outperforming bonds by 10% over a decade. Of course, the reverse may happen as well.

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          • #6
            There are a few potential downsides that I can see:

            1. Loss of control over what type of investments are made (too conservative for a longer term investment horizon?).

            2. High fees, potentially, for this type of plan.

            3. Political risk in that future tax rates may be higher than current rates, so that your current tax savings will lead to higher taxes on withdrawal in the future. This is more of an issue if you are going to be wealthy in retirement.

            Retirement accounts should be thought of as a tax arbitrage play. This arbitrage strategy works well for someone who is in the highest tax bracket now, and will be in a lower tax bracket at retirement when withdrawing funds.

            For us, as supersavers we will be in the highest tax bracket while working and also in retirement. So the tax arbitrage may not work out in our favor. We have shifted our strategy to investing more in ventures that throw off oversize tax write offs, and that is saving us a lot on taxes. Currently, more of our investment dollars are going towards taxable accounts and real estate. I continue to put around 70k per year into tax deferred, but more on the basis of habit and inertia. Those tax deferred investment dollars represent a very small percentage of our annual savings and investments. Due to some unique upcoming deductions, we may have the opportunity to rollover tax deferred investments to Roth.

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            • #7
              Find out how any plan shortfalls are handled by the group. The group owners are on the hook for the contributions for all participants. Fair way would be for each owner to be responsible for his/her share and non-owners be equally shared among the partners IMO. If it’s not spelled out you could be in a situation where owners share equal liability even if they put in nothing for the CBP.

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              • #8
                You may want to double check with the cash balance plan administrator to make sure if you did $150K in the cash balance plan you can still max out the 401K.

                I'm certainly no expert here, but my amount I can put in my cash balance plan depends on a number of factors, including my age and how much I put into the groups 401K plan. THe people in our group eligible for those big time cash balance contributions tend to be older than 37.

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                • #9
                  Originally posted by WCInovice View Post
                  You may want to double check with the cash balance plan administrator to make sure if you did $150K in the cash balance plan you can still max out the 401K.

                  I'm certainly no expert here, but my amount I can put in my cash balance plan depends on a number of factors, including my age and how much I put into the groups 401K plan. THe people in our group eligible for those big time cash balance contributions tend to be older than 37.
                  I second this. Seems unlikely at your age you’ll be eligible for that high a contribution, but I’m no expert either.

                  I’m sure the details have been worked out but since the plan for your CBP can’t technically be “close this one, roll into a 401k, and open a new one,” I’d make sure you’re comfortable with how that’s gonna go down in 7 years.

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                  • #10
                    I would be surprised if you can contribute more than these tables would suggest: https://www.cashbalancedesign.com/re...bution-limits/

                    Over the life of a 7-10 year plan, you may have one or two occasions where you can change your contribution amount. If this is likely to be true, one strategy is to contribute a lower amount in the early years of the plan (when your money will be locked up for a long time in low-yield, fixed-income-like investments) and the maximum amount in the later years of the plan (when it won’t be locked up for as long).

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                    • #11
                      Originally posted by Steven Podnos MD CFP View Post
                      If you have the cash flow to contribute, then it is usually a good idea. Note one danger-if the plan closes at a time that it is underfunded-the lower paid non highly compensated employees must be made "whole" to their expected amounts (usually contributions plus 5% appreciation per year). Shortfalls come out of highly compensated accounts.
                      There are two options here in the case of a shortfall:

                      1) PBGC covered plan - just owners' amounts can be reduced (but only 50% owners, if there are 3 partners, their distribution amounts can not be reduced, and they have to make themselves whole).
                      2) non-PBGC covered plan - amounts can be reduced pro rata for HCEs, or could be reduced for just the owners, depending on what's in the plan document. So getting a hold of the plan document or consulting with the actuary would be a good idea.

                      If OP is a partner, they would typically be responsible for their own shortfall (at least, that's how to do it properly, so that the group is not responsible for making up shortfalls for retired partners or for partners with much larger balances).



                      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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                      • #12
                        Originally posted by WCInovice View Post
                        You may want to double check with the cash balance plan administrator to make sure if you did $150K in the cash balance plan you can still max out the 401K.

                        I'm certainly no expert here, but my amount I can put in my cash balance plan depends on a number of factors, including my age and how much I put into the groups 401K plan. THe people in our group eligible for those big time cash balance contributions tend to be older than 37.
                        For this plan, OP's contribution will not exceed what's allowed for a 37 year old, possibly in the $75k range. If this is a partner only plan or a PBGC covered plan, you can almost always max out the 401k contribution (including Profit Sharing).
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                        Comment


                        • #13
                          Originally posted by EMCCDOC View Post
                          I am trying to determine if there is any down side to maxing out my groups cash balance plan. I’m 37 and me and my wife are maxing out all retirement accounts and putting 50k into my groups cash balance plan. Student loans are refinanced around 2% and will be paid off in 3 years at current rate. My group just increased the cash balance plan max contribution to 150k and I anticipate making an additional 100k starting next year. If I didn’t put this additional income into the cash balance plan I assume I would take home around 50k after taxes which could go toward student loans, taxable investment account or real estate. The cash balance is invested in vanguard passive index funds, and the plan would be to close the plan every 7-10 years and restart it. As far as I can tell going with maxing out the cash balance plan would be the best use of the extra income, but I am wondering if there are any downsides I am not appreciating. Any and all input/ guidance is greatly appreciated.
                          1) I doubt it would be possible to close and restart a plan every 7-10 years. You might be able to have it restarted once, but every 7-10 years might be ambitious. However, even if it is only done once, that's pretty much all you need to move the money into a 401k plan once you max the plan out.
                          2) Over a 10 year period (and possibly longer, depending on when the breakeven occurs), if you are in a high tax bracket, CB plan is better than a taxable account, so if you don't have to wait until you are 59 and 1/2 to take the money out, that's definitely a better investment for tax diversification purposes. So if the plan is restarted after 10 years, that is exactly what you will be looking for to move the money back into your 401k plan. Thereafter you can still participate until you max out, but most of the money would be in your 401k.
                          3) I'm not sure where the $150k came from. Usually CB plans are individually designed, which means each participant can specify their own contribution amount, so some might put in $200k+ and some might put in nothing. Your maximum contribution is around $75k at 37, and while you can front-load the plan and put in a bit more each year, over 10 year period your total contribution would be the same if you just contribute the recommended amount, but if the plan is terminated early, front loading is probably not a great idea since you would be overfunding the plan over the first several years - I would ask the actuary about this.

                          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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