Cash Balance Plans 4: Karen the Architect (A Case Study)

Case Study #1: Karen the Architect

Karen, an architect, is now age 50. She started her own firm which has grown to employ five other people. She has built the business on her own while living a great lifestyle but is now more worried about her retirement income down the road. Her firm’s business has been very steady and profitable. The five other employees are not Highly Compensated Employees (meaning, they don't make above $120,000).

Since Karen cares about her employees’ retirement, too, she implemented a 401(k) plan with a profit-sharing component and all participate. But Karen wants to defer more income and reduce taxes on her firm and on her personal income tax return.

So Karen sees a short video sent to her by her tax accountant. Upon checking into it further, she discovered a Cash Balance Plan can be added to their present retirement plan setup with marvelous results.

Karen has compensation for plan purposes of $285,000 and she maxes out her 401(k) and profit-sharing contributions of $25,000 and $37,000 respectively. Incomes for the other employees range from $50,000 to $30,000.

Once the Cash Balance Plan is in place, Karen can make a cash balance contribution credit of an additional $193,000. She also must make contributions to the five employees of $700 each, or $3500 total.

The end result is that Karen can take 90% of the total amount of contribution credits and profit-sharing distributions. A good result, indeed, for her and her employees also benefit.