Let’s be honest. There’s nothing about the subject of retirement plans that will ever be described as a “cool” topic of conversation. However, since we all eventually are faced with finding a way to pay for our years of living after we leave the workforce; learning about a way to accelerate the growth of our retirement savings accounts while receiving a large tax deduction at that same time is VERY cool. 

For professionals and other business owners, Cash Balance Plans are becoming increasingly popular retirement savings vehicles. That’s because a Cash Balance Plan is a form of Defined Benefit Plan that adds a level of simplicity and ease-of-understanding compared to the complexity of a traditional Defined Benefit Pension Plan while also providing that business tax deduction mentioned above. Let’s look at 3 very cool things about Cash Balance Plans. 

Plans Designs Customized for Specific Individuals 

Based on the ages and compensation levels of the employee population, a Cash Balance Plan may be designed so that the majority of contributions go toward building the retirement accounts of the owners and certain key executives. Plus, the design can be flexible so that it meets the specific retirement savings strategies for each of those individuals instead of forcing them all into the same box. 

Annual Contribution Limits are Much Higher 

Unlike a 401(k) Plan which allows for a maximum annual contribution of $61,000 from all sources in 2022 ($67,500 for those age 50+), Cash Balance Plans allow individuals with the right combination of age and compensation to receive allocations up to the $300,000 range; in addition to their 401(k) Plan contributions. The maximum any individual may accumulate in a Cash Balance Plan is currently in the $3,000,000 neighborhood at age 62 (adjusted for different retirement ages), which might be the coolest solution ever for those who are looking to accelerate the growth of their retirement savings. 

The Coolest Tax Benefits for Business Owners 

A sometimes overlooked benefit of a Cash Balance Plan is that the employer’s contributions to the Plan are eligible for above-the-line tax deductions, which is just a fancy way of saying that they reduce the net income of the business dollar-for-dollar. Let’s look at a cool illustration of how this works: 

A 3 owner business with $900,000 in profit might have a Cash Balance Plan design that allows Owner 1 to use their share by taking $250,000 in salary and having $50,000 allocated to their plan account, Owner 2 decides they want $150,000 in salary with $150,000 allocated to their plan account, and finally Owner 3 chooses to take a salary of $200,000 with their remaining $100,000 portion going to their plan account. The entire profit has been allocated and the business has a net taxable income equal to $0. 

They may sound too good to be true but Cash Balance Plans, and the benefits described above, are approved by the IRS and just might be the tool that provides a tremendously impactful enhancement to the financial well-being of many professionals and other business owners. You’ll need an Actuary if you’d like to explore the possibilities and that’s where our team at Actuaries Unlimited, Inc comes in. We’re happy to provide you with a no-cost, no-obligation, plan design illustration and if all of your elements line up then you may find the results to be very cool indeed! 

Brian Flynn, AIF® Director of Business Development BFlynn@ActuariesUnlimited.com