Cash Balance Plans

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Can those with access to this vehicle talk about your approach to investing in cash balance plans? I’m starting a job with a plan and thinking about how to integrate it into my overall investment strategy.
 
Not much strategy involved.

Asset allocation in the CBP is set for us by plan administrator.

75% total bond index
25% total stock index


All my bonds are held in the CBP so I don’t have any in my 401k.
 
nimbus said:
Not much strategy involved.

Asset allocation in the CBP is set for us by plan administrator.

75% total bond index
25% total stock index


All my bonds are held in the CBP so I don’t have any in my 401k.
Click to expand...
One size fits all or age-adjusted?
 
narcotics999 said:
One size fits all or age-adjusted?
Click to expand...
Everyone in the fund shares the same allocation and contribution limits have to be signed off on by an actuary.

A cash balance plan is a DEFINED BENEFIT return, like a pension, so you are guaranteed a rate of return (typically 3-5%) no matter how the underlying assets are performing. The corporation, which means the partners in a private group, are on the hook if the fund performance comes up short. On the flip side, you may get more than you were guaranteed if the fund is closed and the assets exceed what the investors are owed.

I’ve invested in a CBP and I like it but the returns have been much lower than stocks over the past 10 years. The tax savings are great but who knows how laws and tax rates will change for retirees in 30 years.
 
narcotics999 said:
One size fits all or age-adjusted?
Click to expand...

It’s one size fits all. These plans are designed to target a conservative rate of return, usually in the 4-6% range. The main benefit is the upfront tax sheltering.

There can also be a lot of variability in the structure. Some plans will have you designate your contribution and it will be locked in for a few years. Other plans will periodically close down and distribute funds to your 401k/IRA. Your accountants will be able to provide more details.
 
thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?
 
repititionition said:
thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?
Click to expand...


The limits are so high, I’ve never been close to maxing out the CBP. Although I have a single, never married , older partner who claims he puts almost his entire pretax earnings in it.
 
When set up properly, a cash balance simply can’t be beat with the tax savings, the return, the low risk, and the ability to eventually move it into your 401k. PM me if you’d like details of mine. I consider it the bond portion of my portfolio. i think you can do both, real estate and cash balance. Might take you a little longer to buy a property, but for all the reasons above, I’d still start with the cash balance, again, IF set up properly, you won’t be disappointed.
 
repititionition said:
thank you all. I guess I’m really asking for broader approach to investments/asset allocation in light of access to a CBP.

I will be in a high-tax state and when faced with the option of investing the marginal dollar in alternative assets (rental property, etc.) vs the guaranteed rate of return of ~50% (tax deferral) by putting that pre-tax dollar in the CBP, seems like those with access to these accounts should be maxing them out as they’re able, even to the exclusion of other asset classes. Am I missing something (other than the fact that the 50% savings is overstated because taxes WILL be paid on the back end)?
Click to expand...

I have a cash balance plan and am in a high tax state. For now, it is a relatively small portion of my asset allocation, but I have been creeping up my contributions annually. The maximum that you can contribute is based on your age. Some plans require you to lock in your contribution annually, so you can only change it once a year. I am still young and have many years working ahead of me. It didn’t make sense to me to tie up a large portion of my cash flow and asset allocation into money that I cannot access until retirement age. There’s some level of opportunity cost that is difficult to calculate on an individual basis. What if you commit 50% of your earnings into the CBP, but have an unexpected expense or investment opportunity 3 months later? I would think you would need to offset the CBP with a larger emergency fund since you would be losing cash flow. Right now I think of my CBP as my “bond” portfolio because I am 100% stocks everywhere else. As you get closer to retirement age, it makes sense to put a much larger proportion of your income into the CBP.

I’m not an expert, but that’s how I think about it.
 
Is there any way for a W2 employee to set up a cash benefit plan or defined benefit plan? What I've read seems to imply that self-employed or 1099 workers can do it. Schwab will set up an individual defined benefit plan for $2250 and then charge $1750/year to run it but it appears that's not an option for W2 employees.
 
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pgg said:
Is there any way for a W2 employee to set up a cash benefit plan or defined benefit plan? What I've read seems to imply that self-employed or 1099 workers can do it. Schwab will set up an individual defined benefit plan for $2250 and then charge $1750/year to run it but it appears that's not an option for W2 employees.
Click to expand...

As far as I know, you cannot set one up by yourself as a W2 employee. Your group/company would need to set one up, and then the big hurdle becomes plan participation. This is why some plans lock in your contributions for the year or a few years. Cash balance plans have all sorts of federal regulations regarding discrimination testing and plan participation. If you don’t have enough people willing to put money in, or your company doesn’t want to make a contribution on behalf of most employees, then you can’t set one up. This is probably why it’s much easier to set up as a 1099.
 
thinkorswim said:
As far as I know, you cannot set one up by yourself as a W2 employee. Your group/company would need to set one up, and then the big hurdle becomes plan participation. This is why some plans lock in your contributions for the year or a few years. Cash balance plans have all sorts of federal regulations regarding discrimination testing and plan participation. If you don’t have enough people willing to put money in, or your company doesn’t want to make a contribution on behalf of most employees, then you can’t set one up. This is probably why it’s much easier to set up as a 1099.
Click to expand...
Yeah, sounds like I'm outta luck.
 
I contribute maximally to cash balance pension plan at work and have done so for quite some time. I consider it to be bond equivalent in terms of returns and account for that as a bond in my overall portfolio allocation. It's a large sum of money each year and it'd be nice to have more equity exposure with it, but I have no other tax advantaged way to invest (already filling up backdoor Roth IRA, 401K, 529, and HSA) so I will take the deferred tax advantage where I can get it.
 
Good place to start for those interested.


Cash Balance Plans

Cash Balance plans, also known as "hybrid" plans, combine the high contribution limits of traditional defined benefit plans with the flexibility and portability of a 401(k) plan.
www.cashbalancedesign.com www.cashbalancedesign.com
 
Mman said:
I contribute maximally to cash balance pension plan at work and have done so for quite some time. I consider it to be bond equivalent in terms of returns and account for that as a bond in my overall portfolio allocation. It's a large sum of money each year and it'd be nice to have more equity exposure with it, but I have no other tax advantaged way to invest (already filling up backdoor Roth IRA, 401K, 529, and HSA) so I will take the deferred tax advantage where I can get it.
Click to expand...
Can you roll CBP into IRA, 401K after a few years?
 
narcotics999 said:
Can you roll CBP into IRA, 401K after a few years?
Click to expand...
401K, not sure about IRA. If you can it would probably ruin backdoor Roth.

Can't do it too often or it draws IRS scrutiny.
 
narcotics999 said:
Can you roll CBP into IRA, 401K after a few years?
Click to expand...

yes you can roll over into an IRA although I am not sure when and how often. I have only been able to do it when we closed down one plan and started a new one. I think at a certain age, though, it becomes easier to do it whenever you want although I do not know the details.
 
narcotics999 said:
Can you roll CBP into IRA, 401K after a few years?
Click to expand...

You can roll it into either, but can only do so if you are no longer employed by the group or if the plan is shut down (not every group does this regularly).

Arch Guillotti said:
401K, not sure about IRA. If you can it would probably ruin backdoor Roth

Can't do it too often or it draws IRS scrutiny.
Click to expand...

Agreed, rolling into a 401k is better than a traditional IRA. But to your second point, the IRS could care less about it. It won’t raise any red flags.
 
Ressurecting this. Anyone with strong feelings about doing CBP for a large anesthesia group?
 
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mmag said:
In a high income tax state, it could be a plus for recruitment.
Click to expand...
Anesthesiologists in every state suffer from high federal taxes. Ought to be a recruiting benefit everywhere.

I've been trying to get my group to institute one - gaining traction, but the terms of our new contract are very different and kick in Jan 1st. So the prevailing opinion is we should get a year of that income data before committing to a CBP. I'm all for it regardless. We're going to earn enough to make it worthwhile.
 
caligas said:
Ressurecting this. Anyone with strong feelings about doing CBP for a large anesthesia group?
Click to expand...
We have one set up for our group. I've been told most folks participate. Effective way to reduce taxable income. They need to make sure they understand the details. For example, the way ours is set up, I believe once you sign up you are locked in for a 3 yr period. Also, as these are mostly about tax deduction and not growth, returns are typically set conservatively for around 4-5%. Also must consider that you will be paying taxes on your distributions at retirement at ordinary income tax rates. As opposed to capital gains tax treatments in a taxable account.

Personally, I think they may be most ideal for those docs later on in their careers or getting close to retirement who want to sock away huge sums every year so they can add major cushion to their nest eggs or retire early if they desire.
 
1732489760895.png
 
Its a great plan for 1099 docs earning >750K.

Ofcourse the problem with "pension" is that its relatively inaccessible (i.e. its locked away), returns are lower as some of it has to be in low risk investments, and you may need cash for other things immediately.

However, personally, I will use this plan once my house is paid off and big purchases can be easily handled so I am not needing big lump sums of money.

It needs to be used in conjunction with HSA/529s/SEP/401K/Taxable etc

Immediate tax savings are worth it.

The above illustration is what was sent to me from a vendor two years ago

It costs 1500-2000 to set it up and its typically a CPA that does it.

You can put 150-200k away on this plan YEARLY at our income level (600k-1.2 M). And still be eligible for SEP IRA I believe. 1099 anesthesiologists are at an extremely sweet spot to benefit from this plan IMO.

However, you must contribute same 150-200k plus a little more every year, so you are "stuck" with contributions. There is less flexibility than a taxable account.

It was explained to me that these plans exist for business owners and those professionals who spent earlier parts of their career building a brand and reinvesting their earnings into the business and they did not have a big chunk of retirement savings. However in their 40s and 50s, when their business is successful, this vehicle allows them to "catch up". Think of plumbers, CPAs, attorneys, restaurant owners etc.
Some doctors may be in the same boat with their 20s and early 30s dedicated to medical school and residency and now playing "catch up".

Its because of this plan, W2 jobs never seemed appealing to me.
 
Above are some renditions when I was studying this plan. It is not possible at this time because I am trying to pay the principal on my house, but after that is done, I will truly be debt free and in good financial shape. Then I fully intend to maximize this plan.
 
AKMD_1984 said:
Its a great plan for 1099 docs earning >750K.

Ofcourse the problem with "pension" is that its relatively inaccessible (i.e. its locked away), returns are lower as some of it has to be in low risk investments, and you may need cash for other things immediately.

However, personally, I will use this plan once my house is paid off and big purchases can be easily handled so I am not needing big lump sums of money.

It needs to be used in conjunction with HSA/529s/SEP/401K/Taxable etc

Immediate tax savings are worth it.

The above illustration is what was sent to me from a vendor two years ago

It costs 1500-2000 to set it up and its typically a CPA that does it.

You can put 150-200k away on this plan YEARLY at our income level (600k-1.2 M). And still be eligible for SEP IRA I believe. 1099 anesthesiologists are at an extremely sweet spot to benefit from this plan IMO.

However, you must contribute same 150-200k plus a little more every year, so you are "stuck" with contributions. There is less flexibility than a taxable account.

It was explained to me that these plans exist for business owners and those professionals who spent earlier parts of their career building a brand and reinvesting their earnings into the business and they did not have a big chunk of retirement savings. However in their 40s and 50s, when their business is successful, this vehicle allows them to "catch up". Think of plumbers, CPAs, attorneys, restaurant owners etc.
Some doctors may be in the same boat with their 20s and early 30s dedicated to medical school and residency and now playing "catch up".

Its because of this plan, W2 jobs never seemed appealing to me.
Click to expand...
W2 docs can use them, not clear what the big deal about a 1099 is. You don't have to contribute that much and maybe can't depending on how old you are. Put in whatever you want and defer taxes. The money is not in a volatile investment and depending on you plan documents you may be locked into a contribution for a certain number of years.
 
AKMD_1984 said:
Its a great plan for 1099 docs earning >750K.

Ofcourse the problem with "pension" is that its relatively inaccessible (i.e. its locked away), returns are lower as some of it has to be in low risk investments, and you may need cash for other things immediately.

However, personally, I will use this plan once my house is paid off and big purchases can be easily handled so I am not needing big lump sums of money.

It needs to be used in conjunction with HSA/529s/SEP/401K/Taxable etc

Immediate tax savings are worth it.

The above illustration is what was sent to me from a vendor two years ago

It costs 1500-2000 to set it up and its typically a CPA that does it.

You can put 150-200k away on this plan YEARLY at our income level (600k-1.2 M). And still be eligible for SEP IRA I believe. 1099 anesthesiologists are at an extremely sweet spot to benefit from this plan IMO.

However, you must contribute same 150-200k plus a little more every year, so you are "stuck" with contributions. There is less flexibility than a taxable account.

It was explained to me that these plans exist for business owners and those professionals who spent earlier parts of their career building a brand and reinvesting their earnings into the business and they did not have a big chunk of retirement savings. However in their 40s and 50s, when their business is successful, this vehicle allows them to "catch up". Think of plumbers, CPAs, attorneys, restaurant owners etc.
Some doctors may be in the same boat with their 20s and early 30s dedicated to medical school and residency and now playing "catch up".

Its because of this plan, W2 jobs never seemed appealing to me.
Click to expand...


We’re W2 and have a CBP. The challenge in a big W2 group is to get enough people to sign up to get to the 40% minimum participation rate.
 
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Arch Guillotti said:
W2 docs can use them, not clear what the big deal about a 1099 is. You don't have to contribute that much and maybe can't depending on how old you are. Put in whatever you want and defer taxes. The money is not in a volatile investment and depending on you plan documents you may be locked into a contribution for a certain number of years.
Click to expand...
1099 gives you more flexibility on how much w2 income you want to give yourself through s corp.

Each situation is different and I’ve been 1099 for two years and was w2 anesthesiologist for 8 years (plus 5 if you consider residency plus fellowship), so I’m not saying that there is something wrong with w2. It’s just that our tax code is set up in a way that it benefits businesses. There’s a lot to learn and cbp is just one mechanism.

If you have a good accountant that educates, guides and informs you - 1099 is the way to go imo. You can do calculations and work out exact math and split of w2 income/ distributions/ income much easier if you are 1099.

* I’m not an accountant and above comments are not representative or applicable to all situations* (disclaimer)
 
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AKMD_1984 said:
LLC has an S Corp election
Additionally some of my PRN jobs pay W2
Click to expand...
I think we are speaking different languages.

My job is W2 and can also pay out 1099 income.

If your main job is 1099 you can get W@ income from some other place.

You can't be a 1099 employee and get W2 income from the same gig unless I am mistaken.
 
Arch Guillotti said:
I think we are speaking different languages.

My job is W2 and can also pay out 1099 income.

If your main job is 1099 you can get W@ income from some other place.

You can't be a 1099 employee and get W2 income from the same gig unless I am mistaken.
Click to expand...
Sir, I am not an employed physician anywhere.

IRS scrutinizes "1099 employment" as you are aware.

I am a true independent contractor, i.e. I do not have a fixed schedule and no employer dictates when, how and where I work. That criteria is true 100% of the time. I also have my own pain practice which is steadily and slowly growing.

During a month's time - 20 to 22 work days, I may end up working at 7-10 different places. Sometimes I may go to three different places, like tomorrow I have a 7-12 hourly, then pain procedures from 1-4, then an add on case which they could not find coverage for.

With that said, I have a 70/30 anesthesia/pain practice at this time.

I subcontract to groups and most of the times I get paid 1099, but one large practice in DFW insists that they cannot pay me as 1099 and they insist that I must be paid at W2 PRN which is a terrible arrangement for me because I do not get any deductions or benefits as a W2 PRN (except that they pay the employer portion of my tax but its not going to make a big difference).

But I take that W2 because I like the docs and personnel in the group, besides the politics of that particular AMC. There is more to life than just money.

Through my S Corp, I get paid a reasonable income as W2 as well.

Sometimes I bill for myself and use a billing company if it makes sense to bill, but 95% of my work is an hourly 8hr guaranteed solo MD doing cases at community hospitals. Tomorrow is an exception as it is so incredibly busy that initially I had a scheduled day off, but due to demand I am working.

I take call only when needed, like this weekend and thanksgiving weekend. I do daytime anesthesia only but those days are busy and long. But unlike most W2 employment which does not reward hard work, and extra hours put into your schedule, if I stay and work, I get rewarded. That is why I went this route and personally, it works for me.

I understand my work setup may be atypical since these days very few people do a mix anesthesia and pain practice, but I wanted to use my fellowship and I could not practice pain management with a full w2 job given schedule is dictated by the group. It had to be a day time gig for me, which naturally landed me in this type of independent contracting/ day doc on steroids type of work schedule.
 
nimbus said:
We’re W2 and have a CBP. The challenge in a big W2 group is to get enough people to sign up to get to the 40% minimum participation rate.
Click to expand...
I think you can set everyone who doesn’t contribute at $1 and it’s ok
 
CBP vs aftertax investing vs Mega Backdoor Roth is what it comes down to usually.

CBP is just another way to get more into your pretax account. I think most folks just roll it over to a 401k/IRA or similar untaxed investment account at the end of the day.

If you have money for CBP, presumably you're already doing HSA, Backdoor Roth, Roth individual contrib in your 401k, employer pretax match in 401k (which I believe is lowered if you participate in CBP). And considered 529s if needed.

So then where to put extra money? If FIRE is in your plans, then aftertax is probably the way to go. If you think tax rates will go up/you'll be in a higher bracket at retirement, participate in mega backdoor roth if you have access to that. If you think you'll be in a lower bracket at retirement, then go with CBP.

YMMV.
 
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nimbus said:
529 money can now be rolled into a Roth. The conversion is not a taxable event.


That said, as long as the beneficiary is enrolled in classes, “qualifying expenses” for a 529 are very lax.


www.savingforcollege.com

529 to Roth IRA: Rollover Rules, Conversion Guide, and FAQs for 2026

You can now roll over 529 plan funds into a Roth IRA. Learn how, along with important rules and limits, here.
www.savingforcollege.com www.savingforcollege.com
Click to expand...
Subject to the annual IRA limit. I assume this shares the limit with other IRA contributions so instead of drawing from your income you can just roll over part of your unused 529 instead. Still requires earned income and account age of 15 years. Not super useful at the end of the day imo.
 
Thought you have to offer the same to all employees like 5% of gross or something like that
 
This is a poor and early Dunning-Kruger take.

W2 and 1099 are the same when it comes to CBP tax savings. Assuming your employer setup the CBP properly, deductions and plan fees are still taken pre-tax and reduce taxable income.

I agree that 1099 is a preferable structure with lots of deductions and flexiblity. However, it doesn't really apply when it comes to how a CBP would be structured or save money. The only major benefit is it's easy to get enough participation since you are likely a single member S-corp or LLC. Whereas W2 jobs need 40% participation by members of your group.

AKMD_1984 said:
1099 gives you more flexibility on how much w2 income you want to give yourself through s corp.

Each situation is different and I’ve been 1099 for two years and was w2 anesthesiologist for 8 years (plus 5 if you consider residency plus fellowship), so I’m not saying that there is something wrong with w2. It’s just that our tax code is set up in a way that it benefits businesses. There’s a lot to learn and cbp is just one mechanism.

If you have a good accountant that educates, guides and informs you - 1099 is the way to go imo. You can do calculations and work out exact math and split of w2 income/ distributions/ income much easier if you are 1099.

* I’m not an accountant and above comments are not representative or applicable to all situations* (disclaimer)
Click to expand...
 
USCTrojan11 said:
This is a poor and early Dunning-Kruger take.

W2 and 1099 are the same when it comes to CBP tax savings. Assuming your employer setup the CBP properly, deductions and plan fees are still taken pre-tax and reduce taxable income.

I agree that 1099 is a preferable structure with lots of deductions and flexiblity. However, it doesn't really apply when it comes to how a CBP would be structured or save money. The only major benefit is it's easy to get enough participation since you are likely a single member S-corp or LLC. Whereas W2 jobs need 40% participation by members of your group.
Click to expand...

You contradicted your accusation on my “take” on CBP with your own answer in second paragraph regarding rules of participation. Thanks.
 
500k W2 and 50k 1099 side work

- 401k fully funded between myself and employer to the limit (68k or whatever)
- backdoor roth done
- HSA fully funded
- no kids nfor 529

Anything else I can do tax protected with the 1099 work?
 
Shimmy8 said:
500k W2 and 50k 1099 side work

- 401k fully funded between myself and employer to the limit (68k or whatever)
- backdoor roth done
- HSA fully funded
- no kids nfor 529

Anything else I can do tax protected with the 1099 work?
Click to expand...
You are fine. If single get married with housewife/house husband with ironclad prenup to save another 20k in federal taxes do to tax benefits of being married vs single.

Singles get hit hard after AGI 230k.

Married gets hit hard around 500k AGI.
 
Shimmy8 said:
500k W2 and 50k 1099 side work

- 401k fully funded between myself and employer to the limit (68k or whatever)
- backdoor roth done
- HSA fully funded
- no kids nfor 529

Anything else I can do tax protected with the 1099 work?
Click to expand...


You don’t need kids to start a 529 plan. You name yourself as both the owner and the beneficiary of the plan. You can change the beneficiary in the future.

investor.vanguard.com

10 things that may surprise you about 529s | Vanguard

Learn surprising facts about 529 college savings plans, including tax benefits and flexible uses for education.
investor.vanguard.com
 
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Shimmy8 said:
500k W2 and 50k 1099 side work

- 401k fully funded between myself and employer to the limit (68k or whatever)
- backdoor roth done
- HSA fully funded
- no kids nfor 529

Anything else I can do tax protected with the 1099 work?
Click to expand...

Fine dining with hot colleagues
2000$ business suits
CME vacations
Augusta rule?
 
Arch Guillotti said:
I think we are speaking different languages.

My job is W2 and can also pay out 1099 income.

If your main job is 1099 you can get W@ income from some other place.

You can't be a 1099 employee and get W2 income from the same gig unless I am mistaken.
Click to expand...
I believe what he was referring to was that he is paid by his own LLC as a W2 employee, and his hospital is paying his LLC for services rendered. So, in other words, hospital pays out 1099 wages to physician-owned LLC, physician in turn gets paid W-2 wages by said company. Higher scrutiny yes, but perfectly legal.
 
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