401(k) Plan Alert! Can a Cash Balance Plan be Rolled Into a 401(k)?


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Yes, it is possible to roll over a cash balance plan into a 401(k) plan. Cash balance plans are simply defined benefit plans that provide a specific account balance for each participant, which grows over time through contributions and interest credits.

Can a Cash Balance Plan be Rolled Into a 401(k)?

The process for rolling over a cash balance plan into a 401(k) plan is similar to rolling over any defined benefit plan into a 401(k) plan. However, it’s important to note that specific rules and regulations regarding the rollover process may vary based on the cash balance plan and the 401(k) plan involved.

Before proceeding with the rollover, it’s essential to carefully review the rules and regulations of both plans to ensure compliance and avoid any potential penalties or tax consequences. It’s also recommended to consult with a financial advisor or tax professional to understand better the implications of rolling over a cash balance plan into a 401(k) plan and to help determine if it is the best course of action for your unique situation.

Difference between a 401k plan and a cash balance plan

A 401(k) and a cash balance pension plan are both types of employer-sponsored retirement plans, but they have some key differences. A 401(k) plan is a very commonly defined contribution plan where the employee contributes a portion of their salary into the plan, and the employer can match a portion of the contribution. Employees can choose how to invest their contributions through mutual funds, stocks, and bonds. The employee’s 401(k) account balance reflects the contributions and investment returns.

On the contrary, a cash balance plan is a defined benefit plan structure, which means that the employer is responsible for ensuring a specific benefit at retirement. The plan specifies the benefit formula, typically a combination of a set interest credit rate and the employee’s average pay over a specific time. The employee’s benefit is represented by a particular account balance, which is credited with the set interest rate and grows over time.

One of the main differences between a 401(k) and a cash balance plan is how the benefits are calculated. In a 401(k) plan, the employee’s benefit is determined by contributions and investment returns. In contrast, the benefit is determined by the account balance and the set interest rate in a cash balance plan.

Another difference is the level of portability. Employees own their account balance with a 401(k) plan and can take it with them when they change jobs. On the other hand, a cash balance pension plan is portable to a limited extent, as the employee may only be able to transfer their account balance to another cash balance plan offered by a new employer.

In terms of risk, a 401(k) plan exposes the employee to investment risk, as the employee’s benefit depends on the investment returns. In contrast, a cash balance plan provides a more predictable benefit, as a set interest rate determines the benefit. However, the employer bears the investment risk in a cash balance plan, as they are responsible for ensuring the promised benefit.

In conclusion, a 401(k) plan and a cash balance plan are different types of employer-sponsored retirement plans with different benefits, risks, and portability options. It’s important to carefully review each plan’s features to determine which plan is best for your retirement savings goals.

Paul Sundin

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