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, that generally increase 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 learn 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:
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 own 401(k)/profit share plan. He also contributes additional dollars for his key employees saving him well over $70,000 annually in tax. This plan also helps him retain those same individuals.