Increase Retirement Savings by up to $200,000 and Reduce Your Tax Liability by up to $70,000 through a Cash Balance Plan [Case Study]

Increase Retirement Savings by up to $200,000 and Reduce Your Tax Liability by up to $70,000 through a Cash Balance Plan [Case Study]

What is a Cash Balance Plan?

Cash balance plans are rapidly becoming popular as they present an opportunity for business owners to boost their annual retirement savings. A Cash Balance Plan is a unique type of IRS-qualified retirement plan that features characteristics of both defined benefit and defined contribution plans. The plan allows for significantly larger contributions, generally increasing based on a participant’s age.

The best part about this plan is that participants have an account that grows annually in two ways: first with an employer contribution and second with an interest credit. Certain participants can receive contributions in excess of $200,000, pre-tax, in a cash balance plan; and all earnings grow tax deferred.

In contrast, the present annual contribution limit for 401(k) Profit Sharing Plans is only $54,000, while the limit for IRAs is only $5,500.

To know more about this tax-favored plan, I recommend that you read Daniel Kravitz’s book Beyond the 401(k) available on Amazon. Establishing a cash balance program offers many benefits to businesses over the traditional retirement savings accounts. These include:

  • Reduced Taxes
  • Accelerated Retirement Savings
  • Attracting and Retaining Top Talent
  • Shelter from creditors
  • Potential protection from market volatility

Cash Balance Plan Case Study

At Bridge Business Consultants, we helped the owner of an engineering firm set up a cash balance plan for himself and six key employees, including his wife. The engineer is now able to defer an additional $180,000 per year on top of his $54,000 contribution to his 401(k)/profit share plan for himself. He also contributes additional dollars for his other five key employees saving him well over $70,000 annually in tax and the plan helps him retain his key employees.

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