Defined benefit plans come in several forms, including traditional pension plans and cash balance plans. Many professionals and entrepreneurs spend years focused on building their practices or companies and, as a result, may fall behind on their personal retirement savings.
For those with a consistently high cash flow looking to make up for lost time, a cash balance plan can provide a powerful solution. By adding a cash balance plan, business owners can significantly accelerate retirement savings through large pre-tax contributions, potentially exceeding $250,000 per year depending on age and income.
Wealth Accumulation and Diversification for Business Owners
A cash balance plan is a pension plan with the option of a lifetime annuity. Each year, a participant’s account is credited with a pay credit, typically a percentage of compensation, along with an interest credit based on a fixed rate or an index.
With cash balance plans, you choose the investments in conjunction with your financial professional. Investments may include mutual funds, bonds, equities, annuities, or other marketable securities, and many plans emphasize diversified and relatively conservative strategies designed to help support the plan’s funding obligations while managing volatility.
Tax Deductible Contributions & Tax Deferred Growth
Cash balance plans can provide business owners with the ability to make large, tax deductible retirement plan contributions. Because cash balance plans are a type of qualified retirement plan under the Internal Revenue Code, employer contributions are generally tax deductible to the business, subject to applicable limits. Plan assets also grow on a tax deferred basis until distributed.
Cash balance plans share many of the same tax advantages as other qualified retirement plans, such as 401(k) plans, and in many cases, they can be implemented alongside an existing 401(k) plan to increase overall retirement savings potential.
Increasing Amounts Based on Age
The maximum amounts allowed in cash balance plans are age-dependent. The older the participant, the faster they can accelerate their savings. Subject to IRS limits, the actual contribution is determined by a formula specified in the plan document. It can be either a percentage of pay or a flat dollar amount.
Attract and Retain Employees – Help Them Succeed Financially
While cash balance plans are often established to benefit business owners and key executives, employees typically benefit as well. In many plans, eligible employees receive employer contributions based on a percentage of pay, subject to plan design and nondiscrimination requirements. Each participant’s benefit is also credited annually with an interest credit, which may be based on a fixed rate or a variable index such as Treasury rates specified in the plan document.
At retirement, participants generally have the option to receive their benefit as a lifetime annuity or as a lump sum distribution, which may be eligible to roll over into an IRA or another qualified retirement plan.
Is a Cash Balance Plan Right for You?
If you are a business owner who wants to contribute $50,000 or more annually toward retirement, a cash balance plan may be worth exploring. These plans can allow for significantly higher contributions than many other retirement plans, depending on factors such as age, income, and plan design. But remember, every business and financial situation is different, and because cash balance plans generally require consistent annual contributions, they may not be the right fit for every business.
For owners who prefer more flexibility in contribution levels, a traditional 401(k) plan may be a more appropriate option. That’s why it’s important to work with a qualified financial professional who can help evaluate your options and determine the strategy that best aligns with your goals.
If your business is highly profitable, you want to save a lot more for retirement, and you find yourself personally in high federal and state tax brackets, cash benefit plans can be beneficial for you.
Call Richard Ngin at Foundation Asset Management for a no-obligation consultation and find out if a cash balance plan is right for you. You can reach us at (626)-825-8044.
