Retirement plans for small business owners include Koegh, SEP-IRA, and a Simple IRA. These plans are offshoots of their typical 401(k) brethren. But have you heard of a cash-balance retirement plan? BankRate peeked inside these not so new retirement vehicles.
A cash-balance plan is a hybrid of a traditional pension plan and a defined contribution plan like a 401(k). The account grows annually in two ways: first, a contribution, and second, an interest credit, which is guaranteed rather than being dependent on the plan’s investment performance.
Unlike traditional retirement plans, the cash-balance plans are more complicated to setup and maintain. And, as a result, they cost more to jumpstart.
This is not do-it-yourself retirement planning. Cash-balance plans are complicated and expensive to set up and maintain. You really need expert help. Even the accountant who handles your routine tax filings may not be able to adequately puzzle through one of these.
And what do you get for the expense of setting up one of these retirement account?
The result is that a high-earning individual, member of a small partnership, or a husband-and-wife team can create a cash-balance plan that lets them reach a predetermined retirement savings goal in a relatively few years, sheltering everything they save and earn in the plan from current taxes. The concept isn’t new, but it hasn’t been really clear how the IRS viewed these plans until the last year or two.
But, you may want to stick with the less complicated, easier to setup plans described earlier.
How much do you have to earn to make a cash-balance plan make sense? $250,000 annually is probably the minimum — either as a partner or a solo practitioner, or possibly, as a husband-and-wife team in the same or related businesses.
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