Not everyone can contribute as much as they would like to their retirement plans each year, for a variety of reasons. However, it is vital that the maximum amount possible is deposited each year, because the earlier you save, the more it can grow before the date of retirement. There are options to accelerate retirement savings for those who may be behind and closer to retirement age.
If you are a business owner, you likely fall into a different bracket than your employees. This may exclude you from setting aside as much as you could in tax-advantaged retirement plans. If restrictions to your 401(k) contributions are affecting your savings plans, there may be a way to still save with benefits.
Contribution Plan vs. Benefit Plan
Contribution plans are 401(k) plans and profit sharing plans. There is a limited amount that can go into the employee’s retirement account, and it is wise for employees to reach that goal each year through monthly contributions.
A cash balance plan is a benefit plan that is not based on years of experience and salary. Instead, it is based on annual pay or interest credits. It allows for more uniform benefit earnings and for more specific planning. The perk of a cash balance plan is clear for business owners who may be older than their employees (closer to retirement) and perhaps behind in retirement saving for whatever reason.
The perk of cash balance plans (defined benefit plans) is that they do not have the same limits as other plans. The defined contribution plan is limited by the IRS to employer contributions and deferrals to $54,000 and $60,000 for employees age 50 or older. A cash balance plan only has a cap on the annual benefit payout in retirement, and the benefits for Highly Compensated Employees and non-Highly Compensated Employees must be comparable according to IRS regulations. This allows contributions to be higher (up to three or four times the contribution limits) in the cash balance plan, which may allow someone approaching retirement to accelerate their savings.
If you would like help from experienced financial planners contact us at 952.893.9320 or learnmore@BoulayGroup.com to discuss your retirement planning options.
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Boulay PLLP and Boulay Financial Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc. Prime Global is not affiliated with ValMark Securities, Inc. and ValMark Advisers, Inc.
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