With the election window now open, the time is here to make a decision to sign up for (Tier 1) or to decline (Tier 2) use of the new Market Based Cash Balance Plan (MBCBP).
While we like to give advice tailored to your specific situation, with the December 15th deadline looming, we wanted to provide some thoughts on how to make a tier election.
You should consider making the Tier 1 election if:
- You are in a higher tax bracket today but anticipate a lower tax bracket in retirement.
As an example, if you are in the 35% tax bracket today and anticipate being in the 24% tax bracket in retirement, there is an opportunity to pay less in taxes over the lifetime of your plan by deferring income today.
If you are unsure about how to project your future tax bracket, consider the following income streams: pensions, Social Security, and estimated required minimum distributions (RMDs). Summing these up will give you a good ballpark for estimating your taxable income and future tax bracket in retirement.
- You might be experiencing lifestyle creep.
Lifestyle creep is real and can be detrimental to a financial plan and a little bit of “forced savings” can help regulate that. If you’re accustomed to spending the company contributions when it’s paid out to you and are feeling a little unsure of whether or not you’re saving enough for your long-term goals, this is a great opportunity to have someone else do the savings for you! 
You should pause when considering the MBCBP if:
Your tax bracket today and projected retirement tax bracket are the same.
This one is a real judgment call, but you may want to consider your own tax philosophy. Would you prefer to defer gains today or recognize the income now? This election comes around every 3 years. You can make a different election in 2028, so think about your life and expected events over the next 3 years.
If you anticipate a large outlay of cash like buying a home, you may opt for Tier 2 so you have more liquidity for a down payment. You may also consider opting for Tier 2 if you’re on track for retirement savings, but maybe not for your education savings and could utilize that cash to make 529 contributions.
If you just became an empty nester, you may have less expenses today and wish to catch-up on those retirement savings. You might be a good candidate for Tier 1.
You should consider making the Tier 2 election if:
Your tax bracket today is lower than your projected retirement tax bracket.
Are you nearing retirement and starting to dial back on your trips? If your income has dropped and you are temporarily in a lower tax bracket, but you anticipate going into a higher tax bracket in retirement, Tier 2 might make sense. From a tax perspective, there’s no reason to defer income into higher future tax brackets. Instead, you can take the income today and invest the funds in a taxable brokerage account, or even to a Roth IRA.
Final Considerations
With the employer 401k contribution going up another percent next year, this offering is a great way to let you decide how that overage best helps you achieve your goals. No two clients’ financial plans are identical, but we hope these common decision frameworks we see help to aid you in your decision-making process.