Cash balance retirement plans

Are you a successful business owner or professional service provider who has the problem of paying a lot in taxes because you are strong earner?  Do you feel like your 401(k) plan contributions are not enough and would like to do more?  Perhaps a cash balance plan might be a viable solution for you, either as a sole business owner or a business owner that has employees. 

A cash balance plan is a qualified retirement plan that can be adopted as a stand-alone retirement savings solution or complement or supplement an existing retirement plan like your typical group 401(k) or solo 401(k) plan.  A cash balance plan can be described as a “hybrid” between a defined contribution plan, where the employee bears investment risk, and a defined benefit plan, where the employer bears investment risk, in that cash balance plan participants' account balances will grow annually based on the employer's actual contribution as well as a guaranteed interest credit.    

Cash balance plans consist of pooled investments and the scope of the underlying investment options can extend beyond ordinary 401(k) plan investments and is generally not as limited or restrictive.  The primary objective of a cash balance plan is to allow participants to save for retirement while achieving a potential maximum tax deduction, which is dependent upon age as illustrated in this chart below for 2021:

The pooled investment performance of a cash balance plan must be assessed annually as it determines future employer contributions.  If the plan's investment earnings exceed the guaranteed rate, the excess will be used to reduce future employer contributions but will not affect the amount credited to participants' accounts.  The opposite or inverse fact pattern or scenario holds true as well. 

Based on the chart above and the fact that this type of retirement plan is geared towards those who generate higher incomes and have sufficient excess disposable income to be able to defer it, the best candidates for cash balance plans tend to be:

  1. Those seeking a tax deduction of $50,000 or more and earn $250,000 or more per year
  2. Highly profitable businesses of all types and sizes, including family owned or closely held
  3. Professional services, including CPA and law firms, medical and dental practices, engineering, and consulting firms, etc.
  4. Business owners closer to retirement who want or need to condense and accelerate their retirement savings into a very short period.

If you believe you and your business fit the criteria above and you want to emphasize and concentrate on tax efficient savings, please contact us for more information as we would like the opportunity to answer any questions and help you design and implement a plan.