Cash Balance Plan Loans: How to Borrow from a Plan

Most people who set up cash balance plans don’t consider loan provisions. In fact, many don’t actually understand how cash balance plan loans work and whether or not you can borrow from them.

The reality is that most plans are set up by high income earners. These clients by and large don’t have any interest in taking out a loan nor do they typically inquire about the provision.

But things can happen in life. You may be looking for a large tax deduction but need a little cash for a down payment on a home. Maybe you are looking to remodel your house and need some short-term help. So, let’s take a closer look at how cash balance plan loans can work.

Looking to Get $100,000+ Into Retirement?

We'll show you the #1 tax and retirement strategy!

Quick Links:

Can You Borrow from a Cash Balance Plan?

Well, I have some good news for you. You can borrow from your cash balance plan. But you may not be able to borrow as much as you might think.

These plans are deemed “qualified” plans by the IRS. What this means is that they are governed by the same provisions that are offered by other qualified plans like 401ks. These provisions allow plans to have loan provisions within the retirement trust.

But you may find that the loans can be less than you think. Pursuant to IRS guidelines, participants may borrow the lower of 50% of the vested account balance or $50,000. Remember that this is the lower of these two amounts.

Also, an important point to remember is that most cash balance plans are subject to vesting schedules. The standard plan comes with 3-year cliff vesting. But a business owner can choose to have an immediate vesting that will allow him or her to immediately borrow from the plan.

Your #1 Tax Strategy

We’ll show you how to fund up to $3.5 million!

Even though immediate vesting may work great for loans, it might not work so well for the plan funding. You may find yourself paying more in employee contributions in exchange for the borrowing flexibility.

Examine Loan Provision

But what many plan sponsors don’t realize is that even though a plan may be allowed by the IRS, your plan may not actually have a loan provision written into the document. It seems that this is often an afterthought.

So, make sure that you inquire of your third-party administrator. They can structure the provision up front and make sure that you don’t have any costly plan amendments.

Take a look at the calculation for a solo plan in the table below:

Investment Account $200,000
Vested Amount $200,000
Borrowing Capacity $50,000
Interest Rate 5%

Cash Balance Plan Loans

  • Verify that your plan allows for loans. Even though the IRS will allow it, make sure that your plan has a loan provision. You may need a plan amendment.
  • Determine your vested account balance. Remember that the loan can only be based on your vested loan balance. Your TPA can calculate your vested balance at an interim date.
  • Remember the cap of $50,000. Again, you may not be able to borrow as much as you might like because you are limited to a maximum of $50,000. This assumes you have a fully vested account balance of $100,000.
  • Examine loan term and interest rate. The IRS has specific requirements for loan terms and interest rates. These will be reflected on your loan agreement.
  • Execute loan agreement. Once you have determined that a loan works for you, the administrator will have to execute the loan documents for your signature.

So the good news is that you do have the ability to borrow from a cash balance plan. You can make a large contribution and then take out a loan against the plan assets. This loan is tax-fee and may come in handy.

Paul Sundin

Get a FREE 30 Minute Consultation

Reach out to us today and we'll show you our favorite strategies! We can show you how to structure a plan for maximum tax benefit and provide you with a custom plan design.

Leave a Comment