At Wiser Wealth Management, we work with a lot of airline pilots. Being in metro Atlanta, a lot of those pilot clients are Delta pilots. Casey Smith, the president of Wiser Wealth Management, was in the Delta system at ASA for over 10 years. With an extended pilot network, we have received many calls about the new market based cash balance plan (MBCBP). The RNI committee at Delta did a good job of getting the information out there. Nonetheless, there’s still a lot of misinformation and unnecessary fear about certain aspects of the program.
Market-Based Cash Balance Plan Benefits
First of all, Delta pilots can contribute $22,500 to the Delta 401K plan. Starting in 2024, the company will begin to contribute 17%. If you happen to make over $255,000 a year you’d have this excess of 17% that couldn’t go into the plan because you’d have hit the IRS maximum. Currently, the IRS maximum is $66,000 if you’re under 50 and $73,500 if you’re over the age of 50. It’s important to note that the maximum will most likely continue to increase each year.
What Delta is offering through the Union bargaining agreement, was the first of a kind for pilots, market based cash balance plan. This means that instead of coming back to you in additional pay, the 17% could go into this plan. It’s important to note that you won’t be able to manage the money, or select from investment options like you would inside a 401k. Instead that money has to be managed more like a pension fund. Pensions are typically made of 40% stock and 60% fixed income. The average cost of the target date fund is 0.14% per year, which is very low. However, not as low as the 401K plan, but much lower than if you took money over to your brokerage link and invested on your own.
The biggest advantage inside the market based cash benefit plan is tax related. If you’re at the 37% tax bracket range, any dollar that you can hide from your tax return is essentially saving you 37 cents on the dollar. So, if you elected to opt of the MBCBP (available to pilots hired before June 1-2023) and instead decided to invest that money yourself, you’d have to overcome potential 37% loss in tax, depending on your tax bracket. The second big advantage is that there’s no limit to how much you put into this plan. Another good news is that if Delta were to file bankruptcy the money is still yours, which wasn’t originally part of the plan.
Another important note about the MBCBP is that you could potentially roll it out. At age 59 and a half, you can even roll your 401K money, if you wanted to. If you did not like the allocation and needed to do something different with the money you could roll it to an IRA while you’re still working.
They also offer the option to convert it to an annuity. However, we would hardly ever recommend any pilot to do that. Unless it’s an extreme case, where you’re just really bad with money and you’ve managed to file multiple bankruptcies. With that, you’ve proven that you cannot manage money at any level, then maybe someone needs to hold your money for you and give it back little by little over your lifetime.
Other asset management firms will push for you to convert your 401k into their brokerage link. We highly encourage you to not participate in that. All you need as a pilot is an hourly financial planner to help you manage your money. Watch this video to learn more:
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