Cash Balance 5: Dr. Westing and Dr. Yo (A Case Study)

Dr. Westing, now age 55, started his practice about twentyyears ago and then brought in a slightly younger partner, Dr. Yo, now age 50.Both are starting to think more about their retirement income down the road.

Their practice has been very steady and successful – they are well-known doctors in the Atlanta area - and they employ ten other employees who are not Highly Compensated Employees (the IRS defines a “Highly Compensated Employee” as one earning more than $120,000).

Since they care about their employees’ retirement, too, theyimplemented a 401(k) plan with a profit-sharing component and all participate.But Drs. Westing and Yo wish to defer more income and reduce taxes on theirpractice and on their personal income tax returns.

Dr. Westing hears about cash balance plans from another friend of his who also owns her own practice. Upon checking into it further along with Dr. Yo, they discover a Cash Balance Plan can be added to their present retirement plan set up in a way that is a win-win.

Dr. Welting and Dr. Yo have compensation for plan purposes of $280,000 and both max out their 401(k) and profit-sharing contributions of $25,000 and $37,000 respectively. Incomes for the other employees range from $50,000 to $80,000.

Once the Cash Balance Plan is in place, each of the doctors can make a cash balance contribution credit of an additional $193,000. They also must make contributions to the ten employees at $1000 each, or $10,000 total.

In the end, Dr. Welting and Dr. Yo can take about 95% of thetotal amount of contribution credits and profit-sharing distributions. A goodresult, indeed, for both of the doctors and icing on the cake for theiremployees.