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Cash Balance Plan

The Cash Balance Plan: A smart way to capitalize on your business success and accelerate retirement savings.

You’ve worked hard to build a successful business, but may be wondering if you’ll be able to retire comfortably. A cash balance plan, under the right conditions, may be a way to improve your situation by helping you build your retirement savings in a relatively short period of time.

What is a Cash Balance Plan?

A Cash Balance Plan (CBP) is a tax qualified defined benefit plan that uses hypothetical participant account balances to determine vested benefits. Older, high income business owners and professional practices are uniquely positioned to derive value from this type of plan.

Plan assets are pooled and invested by the trustee or investment manager. Participant accounts are credited with an annual pay-related credit and interest credit. A CBP combines the high contribution limit of a pension plan with the flexibility and portability of a 401(k). CBP provide surprisingly large allowable contributions that were re-affirmed through the 2006 Pension Protection Act (PPA), which also simplified their administration requirements.

How does a Cash Balance Plan Work?

CBPs are maintained by the plan actuary who generates an annual "Participant Statement." Accounts grow annually in two ways: company contributions and annual interest credits. The interest credit targets more reliable stable rates, such as the yield on a 30 year treasury bond. While the contributions to participants must meet the requirements of IRS regulations, the plan can establish categories of participation to meet the objectives of the owners.

Cash Balance Plan and 401(k): Better Together

In order to optimize tax deferral and savings accumulations, a CBP can be combined with a 401(k) plan. As annual contributions to the CBP are not discretionary, CBP plans are best suited for established entities with a steady cash flow.

Top Line Deductibility

Tax deductions, especially “above the line” deductions that directly reduce ordinary income dollar for dollar, are increasingly hard to find. As federal, state, and local taxes continue to rise, CBPs can provide reductions in both taxable and adjusted gross income, helping high income earners move to a lower tax bracket or reduce tax liability on a portion of their income.

Tax Savings Example
Business Owner (Age 55, married filing jointly w/two children)
$400,000 adjusted gross income ($350,000 wages, $50,000 investment income)
No CBP contribution: will pay $103,000 in federal taxes
$150,000 CBP contribution: will pay $51,000 in federal taxes
Federal Tax Savings: *$52,000
* Taxes are deferred only. This information is general in nature and not a substitute for tax advice.