Cash balance plans are a type of pension in which the benefit is stated as a future account balance rather than an income stream. A Cash-Balance Plan is very similar to a normal Pension Plan. You do not technically contribute anything to the plan (unless you are an owner-employee), and you don’t have any control over the assets which are managed on your behalf.
In a normal pension, the benefit waiting for you in retirement is a monthly income stream, but in a Cash Balance plan, your future benefit is stated as an account balance, which you will be able to take as either a lump sum or an income stream.
You will owe income taxes on either one, as with all qualified plans. Since it is a Defined Benefit plan, it will cost more to administer than most other plans. You will have to pay an actuary, an investment company to act as custodian, premiums to the Pension Benefit Guaranty Corporation, and accountant’s fees for filing IRS Form 5500 (found here).
Business of any size can use these plans if it makes sense for them. Professional partnerships with few employees and high income are likely to benefit from these plans, since it may allow them to defer taxes on up to $200,000 of income a year.
The plan must pass top-heavy testing requirements, of course, and cash balance plans are often blended with 401(k)s to use the other plan to help them get enough participation and contributions from lower-income employees to pass the tests.
Plan assets are pooled together, but participants can see their balance in their own “hypothetical” account. This is the balance they can roll out of the plan if they change jobs, assuming they are fully vested.
It is also interesting that many pension plans have been converted to cash-balance plans, in an effort to relieve some of the long-term liabilities of employers by giving employees a definite account balance as opposed to an income stream for life (which is an uncertain length of time).
Where do I Get Started in Saving for Retirement?
What role does inflation play in my retirement planning?
Withdrawals and loans can be taken out of a 401(k) before retirement, but the money may be subject to penalties and taxes
Employers make the decision to establish a 40(k), but it has to be good enough for employees to want to participate
Traditional IRAs, as well as SEPs, SIMPLEs, and 401(k)s are all taxed as income in retirement. Roth IRAs are not taxed
While you are working for your employer, you typically may not withdraw money from your Defined Benefit Plan
Home equity is a notional amount that a person owns at any given time, which is computed as the market value of a...
Corporate earnings are an important metric for companies & the whole economy because it shows the amount of money earned
Accounting interpretations are not official standards, but they give insight for situations which may be new developments
Fibonacci Retracements are places where a strong trend is set back temporarily by a smaller reverse trend (retracement)
A spin-off is when a division or subsidiary of a company is separated from the parent corporation and starts its own
Simply put, a downtrend occurs when the successive peaks of a security's price are trending downward in stock trading