Owners and partners in medical practices typically have a unique problem. Their crushing student loans made it difficult for them to divert much money into retirement savings for a decade or two. As a result, middle-aged medical professionals often find that traditional 401(k) plans don’t let them catch up fast enough. They may also find that as their income rises and their debt decreases, they’re in great need of tax-reduction tools.
Cash balance plans offer a unique solution to this problem. They’ve been around since 1985, but they were slow to catch on because they’re complicated investment vehicles whose implementation was challenging in the early days. The Pension Protection Act (PPA) of 2006 cleared up some of the legal issues and simplified their execution, and they’ve been swiftly gaining in popularity since then.
What Are They?
Cash balance plans are hybrids of defined benefit and defined contribution plans. Annual contributions can be based on either a flat dollar amount or a percentage of compensation. You can either apply an Interest Crediting Rate (ICR) to them, based on any number of options, like a flat rate or an investment index, or you can build in a flat company contribution. So, you’re not making money based on the plan’s investment performance. Your return rate is guaranteed.
Because company contributions fall roughly in the 5-8 percent range, and because an actuary must provide annual certification, cash balance plans can be more expensive to administer than 401(k)s.
When participants leave the practice, their account balances can either be distributed as an annuity or as a lump sum that can be transferred to the next employer’s plan or rolled into an IRA.
The older you get, the more you can invest. Consider the numbers. For 2019, if you’re between the ages of 50 and 65, you’re limited to a $25,000 annual contribution to your 401(k) ($62,000 with profit-sharing). Add a cash balance plan to that—and you can indeed do both—and you’ll be able to put away an additional amount of between $175,000 and $276,000 annually, depending on your age.
If you’re between 60 and 65 and you max out both investment vehicles, you’ll have saved $338,000 in one year through these pre-tax contributions.
An Appealing Option
Cash balance plans can be ideal investment vehicles for medical practices with consistent profitability and sufficient discretionary income. If those characteristics describe you, we’d be happy to help you explore and implement what can be a lucrative addition to your retirement plans. Contact us to get more information and to set up a consultation.