Small Business Owners: Learn How to Turbocharge Your Retirement Savings with a Cash Balance Plan

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Image via RKL.

Do you or your business partners want to increase your retirement savings rate significantly? Does your existing defined contribution plan limit the amount you want to save? Older business owners who answer yes to these questions may benefit from a lesser-known retirement savings strategy: cash balance plans. Similar to a traditional pension, a cash balance plan provides a specific benefit to eligible employees at retirement. These plans are used in tandem with an existing 401(k) or other defined contribution plan.

Cash balance plans have generous contribution limits that increase with age, which allows older business owners a valuable opportunity to boost retirement savings beyond annual tax law limitations of defined contribution plans. Depending on the saver’s age, it may be possible to contribute more than $200,000 a year, tax deductible and tax deferred.

Comparing cash balance plans to other retirement savings vehicles

  • Benefit calculation: Traditional pensions pay out an employee’s benefit as a series of monthly payments for life beginning at retirement. In a 401(k) or other defined contribution plan, the monthly benefit hinges upon the amount of contributions as well as the investment gains or losses on the account. Cash balance plans define the benefit in terms of an account balance.
  • Account credits: In defined contribution plans, amounts credited to accounts depend on the actual investment performance of plan assets. A cash balance plan account is credited each year with a “pay credit” (percent of compensation) and an “interest credit” (either a fixed rate or variable rate linked to an index). A fixed rate of five percent is common in cash balance plans.
  • Investment performance: Unlike a 401(k) or IRA, increases and decreases in the value of the cash balance plan’s investments do not directly affect the benefit amounts promised to participants.

Is your business an ideal candidate for a cash balance plan?

In addition to the questions at the top of this post, here are some additional qualifiers to determine eligibility.

  • Do you or your business partners want to increase your retirement savings rate significantly?
  • Does your existing defined contribution plan limit the amount you want to save?
  • Does your business produce steady income?
  • Do you or your business partners have annual income greater than $250,000 and seeking an annual tax deduction greater than $58,000 (2021)?
  • Does your company have fewer than 15 employees per one owner?
  • Are you and your business partners generally older than your employees?
  • Are you already funding a five percent or more contribution of employee compensation? If not, are you interested in doing so?

Answer yes to the majority of these questions? Your small business may benefit from establishing a cash balance plan for its employees. Cash balance plans may still be set up for 2020 to defer funding up to an employer’s 2020 tax filing deadline.

Professional services firm RKL has a team of retirement plan experts who assist businesses with maximizing their savings and tax benefits. Contact the firm’s Exton office at 484.874.2200 to start the conversation and click here to view a sample 401(k) and cash balance combination and learn which parties are involved in plan administration.

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