Cash Balance Plans Part 1: A (Little Known) Smart Retirement Plan Strategy

Is this type of plan right for you?

If you are a business owner and haven’t heard of a cashbalance plan before…you’ll want to keep reading to find out if you can save a smallfortune in taxes AND ramp up your retirement funds.

How can you do this?  Withthe right plan design for your company, you can combine what’s known as a cashbalance plan with your 401(k).    

Let’s start with the basics of how a cash balance plan works. While a 401(k) allows employees to make contributions to their retirement from their compensation (it's known as a defined contribution plan), a cash balance plan is defined benefit plan, similar to a traditional pension plan.  Like a pension, a cash balance plan provides employees with a guaranteed benefit upon retirement.

Combining the two types of plans has become very attractive to business owners – in fact, the number of these plans EXPLODED over the past decade.  Here’s why:

• Cash balance plans can help the owner orprincipals of the company turbo-charge their retirement savings:  Cash balance plans have much highercontribution limits than a 401(k) plan (even a 401(k) plan with profit-sharing,if you are familiar with those).  Theseamounts increase with age, so you can save more towards your nest egg as youget closer to retirement.  As an example,if you are 60 and over, you could slug away over $200,000 pre-tax dollarstowards your savings…in one year.

• Cash balance plans can you save money on taxes: Cash balance plans can offer companies and individuals significant tax savings.  In fact, some have said cash balance contributions are one of the best tax deductions available in our country today (yes, you read that correctly).

Combining a Cash Balance plan with a 401(k) plan – with proper design – can provide for a retirement strategy with maximum deductibility and significantly higher contributions at a lower cost than a conventional 401(k) or defined benefit plan alone.

~Benefits Advantage by Ascensus, 2019 No. 3

Wondering if your company is a good candidate for this kind of plan? Think about whether or not your company meets the criteria below – if so, you might be on your way to saving some money in taxes and socking more away for retirement.

1. Companies are already contributing to an employer match (or, if no plan is in place, they are willing to do so).
2. Companies are a for-profit company…and have consistent profits.
3. Partners or owners desire to contribute more to their retirement than they can with just a 401(k) or a 401(k) and a profit-sharing plan.

Bottom Line:  If your company meets the criteria above – and you are interested in potentially saving money in taxes and bolstering retirement funds, a cash balance plan might be right for you. 

For more information or to determine if your company is a good fit, visit "Review My Plan" at the top of this page.