Many business owners and partnership members max out their company 401(k) or profit-sharing plan long before they reach the level of retirement savings they actually want. They often don’t realize that significant additional tax-advantaged savings are still on the table. A cash balance plan fills this gap. By layering a cash balance plan on top of an existing 401(k) or profit-sharing structure, high-earning owners can contribute far more each year — often several times the traditional limits, while accelerating their long-term retirement strategy.
The power of larger contribution limits
Cash balance plans allow you to defer a much larger contribution for retirement, while also taking advantage of available tax deductions. Under the 2006 Pension Protection Act (PPA) and cash balance regulations issued in 2010 and 2014, the plans are considered “hybrid” in nature. Essentially, they capture the larger contribution limits of a defined benefit plan along with the portability of a defined contribution plan. This has garnered popularity for cash balance plans, and their flexibility and ease of administration has only increased this recognition.
One of the major considerations for establishing a cash balance plan is the larger contribution amount available. As a starting point, let’s look at some examples below based on the maximum earnings allowed for 2024 ($345,000).
| Age | 401(k) with Profit Sharing | + | Cash Balance Plan | = | Total Contribution |
| 54 | $76,500.00 | $233,000.00 | $309,501.00 | ||
| 64 | $76,500.00 | $332,503.00 | $409,003.00 |
In addition to the increased amount of contributions, it is also important to take into consideration the tax savings this strategy can provide. Let’s look at the following impact:
| Age 54 | Age 64 | |
| 1. Marginal Tax Rate: | 40% | 40% |
| 2. Total Deductible Employer Contribution: | $309,501.00 | $409,003.00 |
| 3. Tax Benefit (1 x 2): | $123,800.40 | $163,601.20 |
| 4. After Tax Cost of Contribution (2-3): | $185,700.60 | $245,401.80 |
| 5. Total Allocations to Owner: | $309,501.00 | $409,003.00 |
| 6. Net Economic Benefit: | $123,800.40 | $163,601.20 |
What’s unique about a cash balance plan?
Several other features make cash balance plans unique. For instance, not every employee has to benefit under a cash balance plan, unlike a 401(k) or profit-sharing plan. Another key feature is that a cash balance plan can be used as a funding vehicle for business succession planning. And unlike most other plans, a cash balance plan can equalize the contribution for partners. This plan offers alternative solutions that can break down the walls that ultimately limit contributions. Thus, it provides a higher level of tax-deferred contributions, while opening larger tax deductions and offering more retirement plan savings.
If you’re interested in learning more about how a cash balance plan may work for you, please contact your wealth management advisor.
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