What are the advantages of 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. Last week, we discussed the features of a cash balance plan. Now let’s move beyond the technical definitions to some of the more specific advantages of adding a cash balance plan. When added on top of an existing 401(k) profit-sharing plan, a cash balance plan can increase annual contribution limits by over $200,000 per year. This is a huge boost for Americans who want to increase their above-the-line deductions or boost their retirement savings. Contributions to cash balance plans are counted as above-the-line deductions (or adjustments to income), which are among the most coveted of tax savings. These deductions occur before the calculation of income bracket and allow the taxpayer to subtract from their gross income, dollar for dollar, before arriving at their adjusted gross income (AGI). These deductions are particularly beneficial for high earners because they allow taxpayers to actually move into a lower tax bracket if they qualify for sufficient deductions. This can be helpful because when an individual reaches a certain income level, the number of itemized deductions that they can claim decreases. Lowering the adjusted gross income, therefore, gives the taxpayer the opportunity to save money (not only by potentially lowering their tax bracket, but also by allowing them to claim more deductions elsewhere). Cash balance plans are also extremely helpful for older business owners who need to catch up on years of retirement savings. These individuals have often spent their lives funneling their money back into their companies and neglecting their 401(k)s and IRAs. Saving for retirement is simply not a top priority until later in life. By then, annual limits on 401(k) profit-sharing plans and other traditional retirement plan contributions make catching up on savings extremely difficult. By substantially increasing annual contribution limits, cash balance plans allow individuals to catch up on decades of retirement savings in just a few years. Substantial tax savings and rapidly growing retirement funds are just two of the many advantages of cash balance plans. We’ll discuss others—including portability, flexibility, and appeal to employees—in upcoming articles.