Cash Balance Plans - Why Have I Not Heard of Them Before?

Susan Powers |
Categories
cash balance
defined benefit
financial planning
retirement planning

It’s a great question.   Cash balance plans continue to be the fastest growing type of retirement plan for several reasons and yet too few business owners are being made aware of them. The December 31st deadline to establish a cash balance plan is quickly approaching but you still have time if they are attractive for you.

What is a Cash Balance Plan?

A cash-balance plan is a defined benefit plan with a twist; benefits are stated as a 401(k)-style account balance, rather than a monthly income stream.  Like a pension plan though they have substantially higher contribution limits. Not only are contribution limits higher, they also increase with age.  For a 50-year-old, the cash-balance contribution limit is $158,000, while a 60-year-old's limit is $261,000. If you are able and interested in saving more than allowed with a 401(k)/SEP only, a cash balance plan may be right for you.

The typical cash balance clients have been medical/dental groups and law firms, but more business owners are discovering the benefits and turning to these plans to turbocharge their retirement savings and take advantage of generous tax deductions.

What makes them so attractive?

  • Higher contribution limits, much higher than allowed with just a 401(k) or SEP
  • Tax-deductible contributions and your money grows tax-deferred
  • Reasonable costs to setup and administer

Is a cash balance plan right for you?

Whether you’re running a one-person operation or have a handful of employees, if you’re a business owner or partner consistently making more than $300,000 a year, you may be an ideal candidate for a cash-balance plan.

Let’s look at an example – A 50 year old business owner

2019 Taxable Income                    $400,000

Tax Deductible

Cash Balance Contribution           $158,000

Taxes Saved                                 ($ 63,200)*

Net After-Tax Cost                         $ 94,800

*(40% Federal & State tax rate)  

 

This is a tax deduction that’s an investment in you!  More inventory or equipment makes sense if truly needed but not to simply reduce income taxes without first taking a deduction by saving for your future.   While contributions can be made in 2020, plans must be established by December 31st to take advantage of 2019 tax deductions. 

Let AssetGrade help you decide if a Cash Balance plan is right for you.  Contact us today to learn more.