Guest, Dan Kravitz, President of Kravitz Inc. and co-author of “Beyond the 401K”, explains what the cash balance retirement plan is and it’s benefits. The qualifications and who qualifies for it. Hosted by Fred Arnold
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What is a Cash Balance Retirement Plan: Insights from Dan Kravitz

retirement planning is an essential aspect of financial management, allowing individuals to secure a comfortable and worry-free future. As retirement approaches, many people are exploring various retirement plan options to maximize their savings and generate a stable income stream. One such option is the Cash Balance Retirement Plan, which has gained popularity in recent years.

To shed light on the intricacies of this retirement plan, we turn to Dan Kravitz, a renowned financial advisor with in-depth expertise in retirement planning. With years of experience assisting individuals and organizations in building a solid financial future, Kravitz provides valuable insights into the concept of Cash Balance Retirement Plans.

So, what exactly is a Cash Balance Retirement Plan? Simply put, it is a defined benefit retirement plan that combines elements of both traditional defined benefit plans and defined contribution plans. It is structured as a notional individual account, allowing participants to have a clear understanding of their retirement benefits.

In a traditional defined benefit plan, the employer promises a specific monthly retirement benefit to employees, typically based on factors such as salary and years of service. On the other hand, defined contribution plans, such as 401(k) plans, allow employees to contribute a percentage of their salary to an individual account, with the employer matching a certain portion. The retirement benefit in defined contribution plans is based on the performance of the contributed funds.

A Cash Balance Retirement Plan combines the best features of both types of plans. Like a defined benefit plan, it guarantees a specific retirement benefit, but the benefit is presented in the form of an account balance, similar to a defined contribution plan. The employer makes contributions to the participants’ accounts, typically based on a percentage of their salary, which grows over time through a fixed interest credit or an indexed credit tied to an investment index.

One of the key advantages of a Cash Balance Retirement Plan is that it appeals to both employers and employees. For employers, it offers the opportunity to provide retirement benefits to their employees while enjoying favorable tax advantages. The contributions made by the employer are tax-deductible, allowing them to reduce their taxable income. In addition, the plan can be designed to favor certain groups of employees, providing flexibility in terms of contribution levels.

For employees, the plan offers the security of a predictable retirement benefit without the investment risk typically associated with defined contribution plans like 401(k)s. Furthermore, unlike traditional defined benefit plans, Cash Balance Retirement Plans offer greater transparency, as participants can track the growth of their account balance.

Dan Kravitz emphasizes the importance of understanding the nuances and potential implications of Cash Balance Retirement Plans before adopting one. He highlights the need for professional guidance to ensure the plan is tailored to the specific needs of both the employer and the employees. Kravitz recommends consulting with a qualified retirement plan advisor who can evaluate the feasibility and potential advantages of this type of retirement plan.

In conclusion, Cash Balance Retirement Plans are becoming an appealing option for employers and employees alike. By combining the features of traditional defined benefit and defined contribution plans, they offer the best of both worlds. With the guidance of an experienced advisor like Dan Kravitz, individuals and organizations can navigate the complexities of these plans and create a solid foundation for a comfortable retirement.