By Eric Kala
CPWA®, CIMA®, CFP®, RMA®, AEP®, RMA®, CLU®, ChFC®, CRPS®
CEO & Private Wealth Advisor, Avid Wealth Partners
Most businesses have established a 401(k) plan. This plan has a dual purpose. First, the 401(k) plan provides the business and its employees with a qualified retirement plan. Second, the business owner receives a tax deduction.
The 401(k) plan has its limits though. The most that can be put away for retirement in a year is $69,000 in 2024 ($76,500 if you are age 50 or older).
What if we could take the attributes of your current 401(k) plan and significantly scale it up? How could we do that?
By adding a Cash Balance Plan to your retirement and tax planning arsenal. A Cash Balance Plan is another type of retirement plan that is fully qualified by the Internal Revenue Service (IRS). It allows an owner that makes more than $345k annually to accumulate in excess of $4.5 million dollars over a ten-year period.
With the addition of a Cash Balance Plan your deductible contribution increases from $69,000 to as much as $452,500 in one year. Potentially doubled with a spouse.
A Cash Balance Plan is a pension plan that looks and acts very much like your 401(k) plan. It has an account balance that grows each year by the addition of an employer contribution and an interest credit. That account balance is also the benefit that you will receive from the plan. The contributions funding the plan are tax deductible. The growth in the plan is tax deferred and the option to rollover your distribution to an IRA so that it continues to remain in a tax deferred vehicle is also available. These are the same features that make your 401(k) plan so attractive, but now we can do this on a much larger scale.
Small businesses and solo-practitioners have begun to use Cash Balance Plans more often. They are being used for both the tax deduction and as a tool to help attract and retain high-end talent. These groups often have 1 to 10 employees or more and we can usually get very good results which potentially include large tax savings...
2024 Maximum Contribution Limits
401k & Cash Balance Combo Plan
*401(k): $23,000 employee deferral with $7,500 catch up if over age 50; Up to $74,000 with profit sharing.
*Cash Balance contributions are based on many variables, specific results may vary.
*Tax Savings assumes a combined 45% federal and state tax rate.
The Cash Balance Plan is not a solution in all instances but when you are looking for larger deductible contributions than you are able to get just in your 401(k) plan, the Cash Balance Plan may well be worth looking into. The leveraged tax savings that a Cash Balance Plan can offer may be a good answer to your tax and retirement questions.
Investment advice offered through Avid Wealth Partners LLC, a registered investment adviser. Avid Wealth Partners does not provide tax or legal advice. Taxpayer should seek such advice from a tax or legal professional.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.