If you have already maxed out your retirement plan savings and want to contribute more than $50,000 tax-deferred, you are in luck. Recent IRS rulings have made a lesser-known retirement plan more appealing to business owners and such highly-paid professionals as attorneys, doctors, and dentists.
These pension plans are called Cash Balance Plans. Bank of America established the first Cash Balance Plan in 1985. Twenty years later, the 2006 Pension Protection Act added some additional clarity. Then In 2010, the Department of Labor (DOL) issued final regulations to the Cash Balance Plan. Finally in 2014, the IRS approved the regulations for the plan. Now Cash Balance Plans are one of the fastest-growing retirement plans on the market.
With a 401(k), you can contribute up to $24,000 for a participant who is 50 years old or older. With profit sharing, you can max out tax-deferred saving at $59,000. But with a Cash Balance Plan, you may have the opportunity to save over $250,000 on a tax-deferred basis.
A Cash Balance Plan must be sponsored by a business, but there are no limitations as to the type of business. Since the contribution calculations are based on age, these plans tend to work very well when the owners are of similar age and the employees are younger than the owners. These plans also work well with solopreneurs. But remember that the tax deferral benefits apply to the entire business. The age-based contribution calculation does not always make a Cash Balance Plan a good fit.
However, when such a plan is designed to align with your goals, you can accelerate your tax deferral savings, which will have a significant impact on improving your financial health.
If you would like an illustration of how a Cash Balance Plan might work for you, please provide us with your census (employee information).