Cash Balance Plans: A Powerful Retirement Option for Business Owners

For business owners looking to maximise retirement savings and reduce taxes, a cash balance plan can be a game-changer. This hybrid retirement plan blends elements of traditional defined benefit plans and defined contribution plans, offering higher contribution limits and guaranteed growth.

Cash Balance Plans: A Powerful Retirement Option for Business Owners

What is a Cash Balance Plan?

A cash balance plan offers employees annual credits in the form of:

1. Contribution Credit: A fixed amount or percentage of salary added to a “hypothetical account.”
2. Interest Credit: A guaranteed rate of return, typically around 5%.

Though similar to defined contribution plans (like 401(k)s), the key difference is that the employer guarantees the interest credit, making it a defined benefit plan.

Why Set Up a Cash Balance Plan?

Here are the top benefits for business owners:

• Larger Contributions: Cash balance plans allow for significantly higher contributions than 401(k)s, especially beneficial for older business owners who want to accelerate retirement savings.
• Tax Savings: Contributions are tax-deductible, offering major savings for business owners.
• Flexibility: Plans can be tailored to favor key employees or owners.
• Employee Retention: The guaranteed benefits can help retain top talent by offering stronger retirement security.

Things to Consider

While a cash balance plan offers great benefits, there are a few important considerations:

• Mandatory Contributions: Annual contributions are required, unlike 401(k)s where they are discretionary.
• Paired with a 401(k): Often, cash balance plans are combined with defined contribution plans, adding complexity.
• Impact of Workforce Changes: Demographic shifts can affect plan costs, and overfunding could result in penalties if not managed properly.

Is a Cash Balance Plan Right for You?

If you want to contribute more than the limits of a 401(k) and are prepared for ongoing contributions, a cash balance plan could be a perfect fit. It’s an excellent way to boost retirement savings and offer a competitive benefit to your employees.  Get help with your Retirement Plans from TMG Pitchers!