For high-earning professionals and successful business owners, traditional retirement plans like 401(k)s often fall short of maximizing savings potential. If you are looking for a way to significantly increase your retirement contributions while lowering taxable income, a cash balance plan could be an effective solution.
A cash balance plan is technically a type of defined benefit plan, but it operates much like a 401(k). Participants have a hypothetical account that grows each year through an employer-funded pay credit, typically based on a percentage of salary, and an interest credit that may be fixed or variable. When the participant retires or leaves the company, they can take a lump sum distribution or roll the balance into an IRA for continued tax-deferred growth.
Cash balance plans are especially attractive for high-income individuals such as doctors, attorneys, consultants, and business owners who have already maximized contributions to traditional retirement accounts. Depending on age and income, annual contributions can exceed $200,000, providing a powerful opportunity to defer taxes and accumulate wealth faster.
They are particularly effective for business owners over the age of 50 who want to rapidly build retirement savings in the years leading up to retirement. Cash balance plans also tend to work best for businesses with stable profitability and a smaller employee base, especially when paired with an existing 401(k) and profit-sharing plan.
Another important advantage is timing. If your business is on extension for your 2024 tax return, you may still have time to set up and fund a cash balance plan for 2024. This can create a substantial deduction for last year while boosting your retirement savings right away. It’s a powerful strategy for businesses that had a strong year and are looking for meaningful tax planning opportunities before filing.
That said, cash balance plans come with strict annual funding requirements and more complex administration compared to standard retirement plans. Business owners considering this strategy should work closely with an experienced actuary and financial advisor to ensure the plan is designed and maintained correctly.
If you would like to explore whether a cash balance plan could be the right addition to your retirement and tax planning strategy, contact our office to schedule a consultation.