Establishing a Cash Balance Plan

​This letter is part of a series on cash balance retirement plans, one of the best strategies to help high-earning Americans reduce taxes and accelerate their retirement savings. Since the loosening of IRS restrictions in recent years, cash balance plans have become extremely popular and only continue to grow, commanding over $1 trillion in assets. Adding a cash balance plan on top of a 401(k) profit-sharing plan can generate hundreds of thousands of dollars in annual tax savings. Throughout this series, we’ve discussed the many benefits to be gained from adding a cash balance plan on top of a 401(k) profit-sharing plan. Accelerated retirement savings, substantial increases to contribution limits, hundreds of thousands of dollars in tax savings—the list goes on and on. Cash balance plans can be complex to establish and administer though, so it is important that small business owners consult with the appropriate financial advisors to make sure that they are selecting the plan that’s right for them and maximizing their potential benefits. Most small business owners establish cash balance plans by first discussing the topic with their tax or financial advisors. Even if an advisor hasn’t worked on cash balance plans themselves, they will often know individuals or companies who specialize in cash balance plans and who can run the numbers and offer precise scenarios predicting potential tax savings. These cash balance plan specialists will receive information about a business, including the number of employees and salary information, and a plan designer will set up scenarios and run calculations to establish the potential benefit to be gained from adding a cash balance plan. They will then develop a detailed legal document that lays out the complete structure of the plan, often in close consultation with the company’s CPA or other financial professionals. Many cash balance plan specialists will complete plan designs entirely free of charge and want to work closely with the client to make sure that the proposed plan is in their best interests. If a business does not have the appropriate profit history or if the business owner does not wish to contribute a certain amount, a cash balance plan may be a wash or even a detrimental expense and hassle. That’s why having the suitable financial advisors in your corner and taking the time to see a comprehensive plan design is crucial. But those who fit into the categories of people most likely to benefit from a cash balance plan (professionals such as doctors, lawyers, and engineers, business owners over 45, and the owners of highly profitable companies, among others) should not be put off by the complexity. The potential tax savings can be well worth the effort.