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Answer:
Dear
Chris,
An
excellent question. For those who are unfamiliar with
the cash balance plan, let's first do a brief 101;
then we'll address your specific concern.
Cash
balance plans 101
A
cash balance plan consists of two ingredients. One,
your employer contributes a set amount (very often
5%) of your salary into a retirement account on an
annual basis.
Two,
your employer also guarantees that the account will
grow by a given rate each year. It's important to
realize that the stated growth rate will either be
a fixed rate or a variable rate -- generally tied
to the Treasury bill rate.
Note:
The account's growth is not related in any way to
profit sharing.
Low
risk. One of the benefits of this type of plan
is that the value of the investments in the account
cannot have a negative impact upon the amount promised
to you. In other words, any investment risks related
to the assets in the account are those of the employer.
If the investments drop in value, your benefits will
not be affected.
Another
plus, is that the plan is federally insured against
loss by the Pension Benefit Guaranty Corp. For details:
www.pbgc.gov.
Key
points to keep in mind
-
The most important factor in how large your account
will grow to be is your salary rather than your
age.
- You
are not required to make investment decisions. That
is the responsibility of your employer.
- The
employer is required to maintain sufficient funds
to pay future benefits, regardless of how well the
account is performing.
- You
are not required to contribute to the plan.
- When
you retire, you receive your money in a lump sum,
or if you wish, as an annuity with periodic payments.
The
age factor
There
is some debate about this point. In general, the plan
is seen as best for those employees in their twenties.
Then as one gets older and reaches their 40s, the
plan is generally said to have less appeal.
That's
because the plan benefits those who stay with a company
for years and years to a far lesser extent than
is true with retirement plans in which the percentage
of contribution increases significantly with the number
of years of service.
To
look at it another way, the typical cash balance plan
treats workers of all ages the same, with benefits
accruing at the same rate during each year of service.
(There are some exceptions to this rule.)
For
thoughtful ongoing discussions about the pros and
cons of the age factor go to: www.aarp.org.
Type in "cash value plan" in the search box.
However,
for employees who do not stay at one job for a long
time or who change jobs several times during their
working years, the age factor may be a moot point.
Upon
retirement
When
you retire - or when you leave your job - you can
transfer the balance in your cash balance plan in
a lump sum and roll it over -- directly into an IRA
-- and suffer no tax consequences. However, an IRA
will not have the same features or guarantees as your
cash balance plan.
You
can set up your IRA here at BUYandHOLD. Click
here to start the process and here
to learn more.
Depending
upon the terms of your plan, you may need to get your
spouse's written consent.
Good
luck!
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