Stop Leaving Money on the Table: How Cash Balance Plans Can Boost Your Wealth

To grow and safeguard your wealth strategically, you need to seize every chance to maximize pre-tax deductions. An often-overlooked opportunity lies in cash balance plans, tailor-made retirement savings vehicles for business owners. Unlike standard 401(k)s, cash balance plans boast substantially higher contribution limits, enabling you to shield more of your income from taxes while reinforcing your retirement nest egg. This advantage proves especially beneficial for high-net-worth individuals aiming to optimize tax benefits and fortify their financial security.

Understanding Cash Balance Plans and Their Benefits

Cash balance plans function differently than traditional defined contribution plans like 401(k)s. While 401(k)s rely on individual employee contributions, cash balance plans are employer-sponsored defined benefit plans. They ensure a predetermined retirement benefit, usually based on a percentage of pay, but present these benefits in a hypothetical account balance, similar to a 401(k).

This unique structure brings several advantages, notably significantly higher contribution limits compared to 401(k)s. Depending on factors such as age and income, contributions to cash balance plans can exceed those allowed in 401(k)s by as much as 10X. This presents a significant opportunity for high-net-worth individuals to shield a larger portion of their income from taxes while establishing a robust retirement fund.

Furthermore, cash balance plans offer the unique advantage of enabling participants to purchase life insurance within the plan. This feature provides a tax-efficient means to secure life insurance coverage while simultaneously contributing to retirement savings. Additionally, cash balance plans provide exit strategies, such as the option to "superfund" an IRA upon plan termination, offering flexibility and control over retirement assets.

Another substantial benefit of cash balance plans is the significant tax deductions they offer both during the funding phase and upon exiting the plan. By leveraging corporate funds to finance personal retirement accounts, business owners can maximize tax deductions, thereby optimizing after-tax cash flows. Moreover, the ability to acquire risk-free assets within the plan complements other retirement strategies, mitigating investment risk and enhancing long-term financial security.

Find additional information on Understanding the Distinctions Between Defined Benefit (DB) and Defined Contribution (DC) Plans for Business Owners here. 👉 https://www.fusion-strategies.com/db-vs-dc-choosing-the-right-retirement-path-for-you-and-your-business

Implementing a Cash Balance Plan

Establishing a cash balance plan involves several steps but can be relatively straightforward with the guidance of knowledgeable financial advisors. The first step is to determine the potential funding level, considering factors such as age, income, and business structure. Working closely with an advisory team, you can then determine the annual funding amount, ensuring predictability and compliance with IRS regulations.

One notable aspect of cash balance plans is their versatility across different business structures, including C Corps, S Corps, LLCs, sole proprietorships, and partnerships. This flexibility allows business owners to adapt the plan to their specific needs and preferences. Additionally, the cost involved in maintaining a cash balance plan is similar to that of forming and maintaining a 401(k) plan. A third-party administrator (TPA) will be hired to value the plan each year and generate a form 5500 to send to your accountant. Typically, there is a one-time setup fee and a smaller annual maintenance fee for the TPA. Importantly, these expenses are deductible to the business, further enhancing the tax advantages of the plan.

The Benefits of Cash Balance Plans: Key Takeaways and Next Steps

Cash balance plans offer a distinct advantage over traditional retirement options like 401(k)s. Unlike typical defined benefit plans, cash balance plans provide clear, easy-to-understand account balances, making it simpler to track your contributions and earnings.

With significantly higher contribution limits, cash balance plans allow you to shield a large portion of your income from taxes while boosting your retirement savings. Additionally, these plans offer flexibility, letting you seamlessly include life insurance coverage for added financial security.

2023 Tax Deductions! Still possible…

Savvy business owners maximize pretax deductions to maximize after-tax cash flows. One of the most elegant ways to do this is by creating a cash balance plan.

If you're filing on an extension, there's still plenty of time to build your private, custom cash balance plan! 

All documents must be in place no later than July 15th, 2024, to receive a deduction on your 2023 taxes. If you haven't filed yet and are looking for tax deductions, we highly recommend exploring a cash balance plan in conjunction with extending your filing so that we can explore this key tax strategy together!

Eager to see what a custom-tailored cash balance plan would look like for you? Call or email us today, and we’ll walk you through the significant advantages you could be enjoying by adding a cash balance plan to your portfolio. 

Email: Team@fusion-strategies.com

If you’d like to learn more about how you can take advantage of other under-utilized vehicles like dividend-paying whole life insurance, you’ll find additional articles on our blog: https://www.fusion-strategies.com/blog