Taxes are on the rise for high earners. The passing of the 2012 American Taxpayer Relief Act (ATRA) increased the federal income tax rate and the Medicare tax rate and placed a tax surcharge on portfolio income. These hikes made protecting their hard-earned money more important than ever for many Americans earning over $400,000 per year. The increasing pressure to find tax savings, combined with IRS clarification of cash balance plan regulations, has led to the soaring popularity of cash balance plans.
A cash balance plan is a defined benefit plan that looks like a defined contribution plan on the participant’s end. The plan administrator maintains a hypothetical account for each participant and credits annual contributions and interest to that account. Annual contributions are typically set at around 5% of the employee’s salary, and the predefined interest rate is usually set somewhere between 3 and 5 percent.
All contributions go into a pooled investment account directed by a trustee. Because the employee’s final benefits are not affected by fluctuations in the portfolio, the employer bears all investment risks and is responsible for coordinating the plan’s investments, usually handled by hiring an investment advisor or an actuary. Employees receive annual account statements similar to those given to 401(k) participants, showing the hypothetical value of their account and the monthly payout that they can expect upon retirement.
Adding a cash balance plan is particularly useful for high earners seeking increased tax savings and for older business owners looking to accelerate their retirement savings. When combined with a 401(k) plan, a cash balance plan can more than quadruple the maximum deductible contribution for an individual, bringing total contribution limits from the $50-60k range to over $200,000 annually. This dramatic increase in deductible contributions helps cash balance plan participants to substantially increase their tax savings.
So, when should you give cash balance plans a second look? Employers who will likely benefit the most from a cash balance plan include:
- Professional practices with high earners (doctors, lawyers, orthodontists, engineers, architects, etc.)
- Older employers who have not saved enough for retirement and would like to accelerate their savings
- Sole proprietors with a high income or large cash flow
- Family businesses
- Any highly-profitable companies
Companies looking to attract and retain highly talented employees, who are often attracted by defined benefit plans
Cash balance plans offer the opportunity to significantly increase tax savings while accelerating retirement accounts for both employers and employees. For many business owners, taking advantage of a cash balance plan is the best tax-deferred savings opportunity in existence. I strongly recommend that you explore the possibilities of cash balance plans. -William Hall III
Cash Balance Advisors is a national company with many locations to assist business owners in building a custom cash balance plan for retirement. We are affiliated with an independent group of highly advanced planning professionals. With the use of a cash balance plan, our group of advisors collaboratively develop forward-thinking strategies and work closely with CPAs to help business owners like you with additional top-line-deductions for a secure lifestyle that will last well beyond your lifetime.
Please see our advisor’s only website here, cashblanceadvisors.org. The password is “success”
Also please see our Unique Value Proposition here, cbaoverview.com