What is a cash balance plan? (And why you should care)

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. Despite the explosive growth and substantial tax benefits of cash balance plans, most Americans are unfamiliar with one of the best tax-deferred savings opportunities in existence. When combined with a 401(k) profit-sharing plan, cash balance plans substantially increase the contribution limits for retirement plans, sometimes increasing available top-line deductions by over 400%. This means that participants, particularly older contributors, can accelerate their retirement savings and simultaneously take advantage of significant tax savings. Cash balance plans are classified as “hybrid” retirement plans: defined benefit plans (think traditional pension plan) that function like defined contribution plans (think 401(k)). Like a defined benefit plan, the ultimate benefit received is a fixed amount, independent of investment performance. The plan sponsor directs investments and ultimately bears investment risk. What sets a cash balance plan apart, though, is its flexibility and hybrid nature that makes its function appear similar to that of a 401(k). When businesses choose to add a cash balance plan, they generally do so on top of an existing 401(k) profit-sharing plan. This allows high-earning employees to put away more money for retirement at a much faster rate while providing significant tax savings. Those who stand to benefit the most from a cash balance plan include: • Professionals with high incomes such as doctors, engineers, lawyers, orthodontists, etc. • Business owners over 45 looking to substantially increase their retirement savings in the coming years • Highly-profitable companies • Business owners wanting to contribute more than the traditional 401(k) limits to their retirement while accruing substantial tax savings For Americans earning over $400,000 per year, cash balance plans are a game changer. With the potential for hundreds of thousands of dollars in annual tax savings, a closer look is well worth the time.