Cash Balance Plan Disadvantages: Top 3 Mistakes to Avoid!

By now, you’re probably aware of an excellent retirement structure called a cash balance plan. But how much do you really know about them? You probably know a lot about the advantages, but what about the disadvantages?

In this video, we walk through the disadvantages of these plans. There aren’t many of them. But it’s still making sure that you are aware of any pitfalls. If you understand the downside, the upside will take care of itself.

Probably one of the most significant downsides of these plans is planned permanency. These plans are set up with permanent intent. Don’t think of them as a short-term funding situation. It would be best if you planned on having them for at least several years.

I don’t think because a plan is permanent, you have to have the plan open forever. As long as you have long-term intent, you should be fine. The IRS requires a sound business purpose when terminating a plan.

The next disadvantage is the fact that the plans require mandatory annual contributions. This usually isn’t a big problem if you are a good candidate for a plan. If you want to get $100,000 a year into a plan having a mandatory contribution is not that big of a deal.

However, if you see yourself having a funding issue in a given year because you’re buying a house, boat, or fancy car. This could be an issue for your cash flow.

The last significant disadvantage to the plan is the fee structure. These plans will cost two to $3000 a year to administer. As such, the cost does not make sense if you only want to get $20,000-$50,000 into retirement.

But the cost is only justified if you want to do $100,000 or more. Of course, the fees are also tax deductible, so you’ll probably save 40% on the costs alone.

If you’re in the right situation, these plans can be a home run. They allow tremendous contributions and flexible funding ranges. But make sure you understand the downsides. If your income is marginal and you’re unsure if you can commit to several years, you might want to think twice.

If you think these disadvantages are a big concern, make sure you reach out to us and schedule a call, and we can discuss it with you. We are always here to help!

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