Today we’re excited to share one of our favorite retirement plan solutions: a cash balance plan.
A cash balance plan is a different type of retirement plan, and it may be an option for you to add onto your existing 401(k).
Many of our clients have recently been bringing up the changes to our nation’s tax code. In our beautiful state of California, high-income earners may find that these changes equate to a tax increase rather than a tax cut.
That being said, there are two main reasons why clients leverage cash balance plans:
- To reduce their taxable income.
- To put away more for retirement.
Cash balance plans are a type of defined benefit plan. It looks similar to a 401(k) plan in that each individual has an account balance. A cash balance plan is unique, however, in that it allows for very high deferred tax contributions.
As an example, we just put in a plan for a business owner client of ours where we were able to put in $150,000 as a cash balance contribution. This was in addition to the $61,000 our client already had put into their 401(k) and profit sharing plan. Now this individual puts in a total, tax-deductible contribution of $211,000 per year.
The amount an individual can put into a cash balance plan depends on their age. Someone in their mid-30s may be able to put in an additional $60,000 per year, whereas someone in their mid-60s may be able to put in an additional $250,000. Getting older does have its advantages.
The reason for the big difference between age groups is that there’s a lifetime maximum of about $2.5 million for these contributions. So if you or someone at your company is a high-income earner looking to pay significantly less in taxes and accelerate your retiring savings, a cash balance plan might be the right solution.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.