Advantages of Establishing a Cash Balance Plan
The primary benefit of establishing a cash balance plan is to super-charge your retirement savings, while providing significant tax deductions for high income earners.
Although contributions are dependent on several factors, a business owner who is 55 years old, may be able to contribute as much as $200,000 per year vs. the maximum 401(k)/profit-sharing contributions of $67,500. If we were to assume the top marginal tax bracket of 37%, a business owner could defer nearly $75,000 a year in federal taxes. State tax deductibility may vary from state to state, and you should always consult with a tax advisor.
As mentioned earlier, cash balance plans can be designed in conjunction with a 401(k)/profit-sharing plan. These contribution amounts would be in addition to the contributions being made to those plans, as well. Another benefit is the contribution limits can grow as you get older.
For business owners who may spend most of their earnings in the earlier part of their career investing back into the business, as the business matures a business owner could back end their contributions in later years to “catch up”. The reason for this is the maximum permissible lump sum distribution from a cash balance plan is $3.15 million during 2022, so an older person has fewer years to save toward that maximum allowing for higher contributions. Younger business owners may still benefit, but to a lesser extent.
In addition to the flexible structure, which allows cash balance plans to be structured together with a 401(k)/profit-sharing plan, cash balance plans allow for a wide range of investment options. Most 401(k)s typically limit participants to choose from a plan line up that has a handful of funds chosen by the plan administrator or investment manager. A cash balance plan can open the universe of funds and investments that may not be available within a 401(k), such as individual stocks and bonds, however, don’t forget the employer bears the investment risk.