Page 29 - JoFA_Jan_Apr23

TAX / PERSONAL FINANCIAL PLANNING
The rise of the

cash balance

pension plan

Become familiar with this hybrid type of

pension plan and its advantages for the
right businesses.

By Grant S. Donaldson, CPA

any successful business owners and It can accelerate the buildup of client retirement
professionals begin their high-earning assets far beyond other popular plans that are avail- About the
Myears belatedly because of lengthy able — and can be used in combination with other author
educational requirements and initial careers as plans. The government rules for this plan have been Grant S.
employees. Financial planning for this group may refined and clarified over the last decade, and we Donaldson,
come late, but there are effective tools to accelerate now know it formally as a cash balance pension plan, CPA, MS, is an
the savings process, and one is the focus of this or simply cash balance plan (CBP). investment adviser
article. who founded the
Most CPAs and their business owner clients are THE BASICS OF CBPs financial advisory
familiar with the popular company retirement plans Retirement plans come in two general types: firm Tudor
available. These include Sec. 401(k) plans, simplified defined benefit and defined contribution. Often Financial, which
employee pension plans (SEPs), SIMPLE IRAs, referred to as a hybrid, a CBP is a defined benefit now serves clients
and profit-sharing/money purchase plans. Yet, plan that has some characteristics of a defined in over 30 states.
there are other less well-known, but much more contribution plan, where each participant’s benefit
generous, retirement plans designed specifically is stated in terms of an account balance. Let’s
for late-blooming savers. One of these is related say, for example, a participant has a cash balance
to a traditional pension plan (formally known as in the plan of $200,000 upon retiring at age 67.
a defined benefit plan), which historically has had The individual has a right to an annuity based on
some drawbacks that have caused its slow demise. that amount. However, under most CBP plans,
But a newer, modified hybrid version of this older the individual could instead choose a lump-sum
plan contains improved features that can help payment, which generally may be rolled over into
clients ramp up retirement savings and substantially an IRA or another employer’s retirement plan if
reduce taxes with fewer downsides than traditional that plan permits it.
pension plans. Unlike a traditional pension plan in which an
This modified pension plan is a gift from the individual who retires is promised a monthly pay-
U.S. Department of Labor (DOL) and the IRS. ment for life, a participant’s retirement benefit

journalofaccountancy.com January 2023 | 27