Cash balance plans may sound almost too good to be true. In fact, they are the way pension plans used to be designed in the United States of America before they were widely replaced by 401k plans. Cash balance plans combine the much higher annual contribution maximum amounts of defined benefit plans with some of the flexibility of defined contribution plans like 401k's. They are the best of both worlds. Without going into the technical details of how they work, in this post we will highlight three reasons all doctors should want to participate in cash balance plans.
1. The Government Pays You to Pay Yourself – Tax Deduction
All contributions made to cash balance plans by employers on behalf of themselves and employees are tax deductible. The government effectively pays you to pay yourself and reward your employees. A 50 year old doctor putting $250,000 into their cash balance plan per year will see their account grow by $250,000 rather than their bank account increase by $125,000. At the end of 10 years, when the doctor rolls a 7-figure cash balance plan into an IRA, they will only be taxed on the money drawn. The remainder continues to grow tax free inside the IRA until they need it.
2. Make Up For Lost Retirement Savings Years With Turbo Charged Contributions
As any doctor or their family members know, it takes a long time to become a doctor. After university, medical school, and a low-paying residency, doctors finally enter their prime earning years after their mid 30’s and into their 40’s. It is a wonderful feeling to finally get a great job offer after so much hard work. But, new doctors should make sure they negotiate a great benefits package at the same time. After all, what matters even more than your gross salary is your net take home pay. Young doctors deserve the ability to catch up on missed tax-deferred savings that their peers enjoyed at a younger age. With a 401K only this would be impossible. The cash balance plan is the remedy.
3. Recruit the Best Employees
Is your practice based in a lovely second city or town? Have you historically had a tough time convincing great doctors to move to your wonderful city of 100,000 when Los Angeles and New York are some of the other options? Well, adding a cash balance plan to your practice that new doctors can participate in is a great leveler.
Imaging competing against another group where the best benefits package they offer includes a 401K with its maximum $19,500 contribution for a 35 year old doctor. Instead, you offer up to $155,000 in annual tax-deferred contributions through a cash balance plan combined with a 401K with profit sharing. Further, by the time they are 40, they can contribute up to $176,000 per year.
Source: MKAM & PCS Retirement
In a post-Covid world, people all across the country have been re-evaluating the importance of living in dense urban areas and fleeing for the suburbs and affordable smaller cities with a bit more nature. Combine this nascent shift with the power of a cash balance plan and you will have the natural advantage over groups in bigger cities.
Doctors, you work hard and help people for a living. Allow a cash balance to help take care of you and your family.