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Should I invest in cash balance plan?

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  • Should I invest in cash balance plan?

    I have the opportunity to participate in cash balance plan. However, I am not sure that putting more money in a tax deferred account is the right thing to do now since taxes are most likely to go up in the future (obviously, pure speculation). So I am not sure if I should save on the tax deferral now in the cash balance plan or keep putting the "extra" post tax money in syndications or post tax accounts (with Merrill Lynch). I am close to being financially independent and I am in the highest tax bracket. Thanks for any responses.

  • #2
    The question isn’t about whether brackets will go up but whether your marginal rate now is higher or lower than your marginal rate of withdrawal of those funds.

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    • #3
      Depends on a lot of things.

      How much can you contribute to cash balance plan?

      What is your tax-deferred account balance?

      What is your taxable balance?

      How old are you?

      When do you plan to retire?

      ….among many other questions.

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      • #4
        In highest tax bracket, the answer is probably yes to investing in cash balance plan. If you anticipate your retirement is going to be posh enough to still be in the top tax bracket during retirement and that bracket is higher than current top bracket probably best to avoid cash balance (but challenging to predict what taxes will be in the future).

        As abds pointed out there is insufficient information provided to make a solid recommendation.

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        • #5
          Originally posted by ENT Doc View Post
          The question isn’t about whether brackets will go up but whether your marginal rate now is higher or lower than your marginal rate of withdrawal of those funds.
          I agree. Hey, that was easier!

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          • #6
            Originally posted by Turf Doc View Post

            I agree. Hey, that was easier!
            Implicit in my comment was a desire to analyze things with more specificity. For example, current federal and state tax rate. Same state in retirement? Current pre-tax balance. How many years until the pre-tax funds are put to use? Draw down plan? When taking SS?

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            • #7
              Originally posted by spine doctor View Post
              I have the opportunity to participate in cash balance plan. However, I am not sure that putting more money in a tax deferred account is the right thing to do now since taxes are most likely to go up in the future (obviously, pure speculation). So I am not sure if I should save on the tax deferral now in the cash balance plan or keep putting the "extra" post tax money in syndications or post tax accounts (with Merrill Lynch). I am close to being financially independent and I am in the highest tax bracket. Thanks for any responses.
              There are several other threads on this topic, but in a nutshell, it comes down to this:
              1) Even if your bracket in retirement will be the same, you'll still net some tax differential since your distributions are taxed at an average rate. So if your income in retirement is small, you might end up in a very low bracket. If/when taxes go up, chances are they won't go up that much for lower brackets.
              2) CB vs. taxable: CB wins over a 10 year period (and possibly longer) hands down for someone in the highest brackets, at least as far as the accumulation phase. Distribution phase can also be a wash because Roth conversion strategy (when implemented correctly) can be very tax efficient.
              3) Taxable account can be at risk of higher taxes as well, and no way to mitigate this unless you sell early, which also leads to more taxes. This will be true especially while you are still working (again, higher taxes will probably happen for those in the highest brackets). That said, you should absolutely have a taxable account in addition to other types of accounts.
              4) So unless you are going to make the same or more income in retirement, you are going to end up in the situation described in 1). So if you are now in the highest brackets, CB plan is a good investment over a 10 year period (assuming maximum contribution). The main goal of contributing to tax-deferred accounts is the ability to convert to Roth in retirement when your income is low. This article explains some ideas behind the strategy (including the role of the taxable account, which is quite important):

              https://www.whitecoatinvestor.com/me...sa-401k-plans/

              In short, you would need to analyze your situation and figure out where you are. For most docs, Roth conversion strategy will work quite well, and CB plan is one way to diversify your tax liability and to allow you to implement this strategy.

              EDIT: Of course, I'm assuming that CB plan has low fees (no AUM), low cost investments, and is managed prudently (as an employee you will not care as you'll always get your crediting rate, but as an employer you certainly do).
              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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              • #8
                Thanks for all the responses. I knew that you would want more information. I am in the highest tax bracket now. I live in state that has income taxes and I don't plan on moving. I plan on working until at least age 65 and maybe longer. Age 52. I have $2.2 million in my 401K. I have net worth over $10 million. I plan on doing Roth conversions if I can when I retire and have no income, and I plan on taking social security at age 70. My main question is whether to defer more money now in the cash balance plan and pay later when I retire or put extra money into post tax accounts like real estate or brokerage account. Thanks for everyone's input.

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                • #9
                  Originally posted by spine doctor View Post
                  Thanks for all the responses. I knew that you would want more information. I am in the highest tax bracket now. I live in state that has income taxes and I don't plan on moving. I plan on working until at least age 65 and maybe longer. Age 52. I have $2.2 million in my 401K. I have net worth over $10 million. I plan on doing Roth conversions if I can when I retire and have no income, and I plan on taking social security at age 70. My main question is whether to defer more money now in the cash balance plan and pay later when I retire or put extra money into post tax accounts like real estate or brokerage account. Thanks for everyone's input.
                  Max out CB contribution, put the rest in taxable. If your CB plan allows you to put maximum amount based on your age, I would do that. You will max it out in 10 years after which you can contribute more to a taxable account.
                  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


                  • #10
                    Originally posted by spine doctor View Post
                    Thanks for all the responses. I knew that you would want more information. I am in the highest tax bracket now. I live in state that has income taxes and I don't plan on moving. I plan on working until at least age 65 and maybe longer. Age 52. I have $2.2 million in my 401K. I have net worth over $10 million. I plan on doing Roth conversions if I can when I retire and have no income, and I plan on taking social security at age 70. My main question is whether to defer more money now in the cash balance plan and pay later when I retire or put extra money into post tax accounts like real estate or brokerage account. Thanks for everyone's input.
                    Kon is the expert so me agreeing with him is kinda backwards, but I will anyway. In your situation, I would max out the CB plan.

                    Back of napkin calculations: $2.2M plus max contributions plus compounding for another 13 years = around $5M at 5% return. Plus $2.9M CBP. Total of $8M or so. Compounding until you're 72 = $11M. RMDs at that point would be $400k a year or so, federal effective rate of 20%. Save your income at 37+% federal now, withdraw at 20ish% effective rate in the future.

                    All very rough calculations involving rounding, making assumptions of 5% return, no change in tax rates, no additional income in retirement that may bump your effective rate, and ignoring Roth conversions. But I'm also assuming you are putting a lot of money in taxable accounts and maybe other investments now, so adding more to the tax-deferred portion of your portfolio is good diversification in my opinion.

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                    • #11
                      Originally posted by abds View Post

                      Kon is the expert so me agreeing with him is kinda backwards, but I will anyway. In your situation, I would max out the CB plan.

                      Back of napkin calculations: $2.2M plus max contributions plus compounding for another 13 years = around $5M at 5% return. Plus $2.9M CBP. Total of $8M or so. Compounding until you're 72 = $11M. RMDs at that point would be $400k a year or so, federal effective rate of 20%. Save your income at 37+% federal now, withdraw at 20ish% effective rate in the future.

                      All very rough calculations involving rounding, making assumptions of 5% return, no change in tax rates, no additional income in retirement that may bump your effective rate, and ignoring Roth conversions. But I'm also assuming you are putting a lot of money in taxable accounts and maybe other investments now, so adding more to the tax-deferred portion of your portfolio is good diversification in my opinion.
                      Deleted post. Didn’t see OPs above reply with specifics.

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                      • #12
                        Originally posted by ENT Doc View Post

                        Implicit in my comment was a desire to analyze things with more specificity. For example, current federal and state tax rate. Same state in retirement? Current pre-tax balance. How many years until the pre-tax funds are put to use? Draw down plan? When taking SS?
                        Yep, you're exactly right. Looking forward to what you come up with, although I'm surprised there's not already some utra-detailed roth calculator floating around somewhere?

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                        • #13
                          Originally posted by Turf Doc View Post

                          Yep, you're exactly right. Looking forward to what you come up with, although I'm surprised there's not already some utra-detailed roth calculator floating around somewhere?
                          The question is really about CBP vs the alternative. How much are you expected to be contributing to the CBP and for how many years? What is the expected return of the CBP? I’m assuming the rest of your net worth, excluding primary home, is mostly in taxable? Also, how much are you planning on drawing from the 401k, including conversions, and at what age?
                          Last edited by ENT Doc; 07-21-2021, 04:29 AM.

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                          • #14
                            Originally posted by Turf Doc View Post

                            Yep, you're exactly right. Looking forward to what you come up with, although I'm surprised there's not already some utra-detailed roth calculator floating around somewhere?
                            Any calculators for multi year Roth conversions amounts? What I find is single year calcs.

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                            • #15
                              Originally posted by Tim View Post

                              Any calculators for multi year Roth conversions amounts? What I find is single year calcs.
                              My WCI post had a link to a calculator, and in the comments there was a link to an excel software that had the capability to do a custom scenario (with videos that show you how to do it - the software is $50, while the calculator has a free 7 day evaluation period).

                              https://www.whitecoatinvestor.com/me...sa-401k-plans/

                              There is absolutely nothing online beside these two options that I could find. Even professional money management software does not have the multi year Roth conversion calculator/optimizer. Some day it will be available, but the issue is that only those with large portfolios will benefit (so ~$2M or above), thus there isn't a big demand for this from the general public.

                              Another issue is that you pretty much have to set up a whole end to end planning scenario with multiple assumptions, so there is no way to have a simple calculator for this one. One way to do it is to assume 'final' portfolio amounts/retirement ages to avoid having to input too much into the options I outlined above.
                              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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