I have a new cash balance plan available at work. My spouse and I are trying to determine if we should use it, and if so, how much I should contribute. I don't have any experience with cash balance plans, so I'm wondering if there are pitfalls that I need to understand before participating.
Personal income: $200k (partner in medical group, part-time hours)
Spouse income: $550k
Marginal tax rate: ~45% (federal + state)
My current retirement plan: 401k + profit sharing plan, which has a max total contribution of $70k for 2025. I am unable to contribute maximum due to income being less than $280k (minimum required to contribute $70k).
New plan: Group is starting a cash balance plan which would apparently allow me to contribute a large percentage (waiting for actuary numbers, but possibly up to 80%+ between CBP and 401k/SH) of my salary tax-deferred. The general plan would be to keep the plan open for about 5 years before closing the plan and rolling the money into my 401k at that time.
Pros:
-significant increase in tax-deferred savings (maybe up to $150k between CBP and 401k/SH), can save 75-80% of my salary pre-tax, possibly. Seems like a good idea at a 45% marginal tax rate.
-Ultimately, will be able to roll the money into a 401k in around 5 years and then have full investment control.
Cons:
-Higher fees compared to 401k/SH plan. Group has been quoted 5k-10k/year to run the plan. Not sure the exact amount or what the investments will be. Seems like the tax savings is prioritized more than focusing on low-cost, bogleheads investments.
-Decreased amount I can contribute to 401k/SH. As my salary is already below $280k needed to max the 401k/SH plan, contributing more to the CBP means I will be contributing even less to my safe harbor as the CBP contributions will decrease my salary to calculate my safe harbor percentage.
-Possible complications if people leave the group early and need to be paid out by the cash balance plan. I don't understand this part all that well, but if the underlying investments are down and someone leaves the group, we may need to add money to the plan.
Right now, we are leaning toward contributing the maximum to the CBP. It seems like the additional tax savings by deferring at a 45% marginal rate are worth the trade-off compared to paying the taxes and investing in taxable. We are able to defer my entire salary and live off spouse's, so the comparison is contributing maximally to the CBP vs. just paying the taxes and investing that money in taxable (which is what we have been doing).
Thanks for any insight!
Personal income: $200k (partner in medical group, part-time hours)
Spouse income: $550k
Marginal tax rate: ~45% (federal + state)
My current retirement plan: 401k + profit sharing plan, which has a max total contribution of $70k for 2025. I am unable to contribute maximum due to income being less than $280k (minimum required to contribute $70k).
New plan: Group is starting a cash balance plan which would apparently allow me to contribute a large percentage (waiting for actuary numbers, but possibly up to 80%+ between CBP and 401k/SH) of my salary tax-deferred. The general plan would be to keep the plan open for about 5 years before closing the plan and rolling the money into my 401k at that time.
Pros:
-significant increase in tax-deferred savings (maybe up to $150k between CBP and 401k/SH), can save 75-80% of my salary pre-tax, possibly. Seems like a good idea at a 45% marginal tax rate.
-Ultimately, will be able to roll the money into a 401k in around 5 years and then have full investment control.
Cons:
-Higher fees compared to 401k/SH plan. Group has been quoted 5k-10k/year to run the plan. Not sure the exact amount or what the investments will be. Seems like the tax savings is prioritized more than focusing on low-cost, bogleheads investments.
-Decreased amount I can contribute to 401k/SH. As my salary is already below $280k needed to max the 401k/SH plan, contributing more to the CBP means I will be contributing even less to my safe harbor as the CBP contributions will decrease my salary to calculate my safe harbor percentage.
-Possible complications if people leave the group early and need to be paid out by the cash balance plan. I don't understand this part all that well, but if the underlying investments are down and someone leaves the group, we may need to add money to the plan.
Right now, we are leaning toward contributing the maximum to the CBP. It seems like the additional tax savings by deferring at a 45% marginal rate are worth the trade-off compared to paying the taxes and investing in taxable. We are able to defer my entire salary and live off spouse's, so the comparison is contributing maximally to the CBP vs. just paying the taxes and investing that money in taxable (which is what we have been doing).
Thanks for any insight!
Statistics: Posted by SteelPenny — Wed Jan 29, 2025 7:15 pm — Replies 0 — Views 79