CASH BALANCE PLANS PROS AND CONS: IS THIS PLAN RIGHT FOR YOU?

by | Oct 8, 2019 | Retirement, YouTube

KEY TAKEAWAYS

Are you a business owner who has a high income and wants to save more money on your taxes? You’ll want to pay close attention to this week’s video because I’m talking to you!

In this week’s video, you’ll learn:

    • How the Cash Balance plan can potentially save you 6-figures in tax savings!
    • Why the Cash Balance plan is a powerful tool in succession planning
    • How, in just 5-10 years, the Cash Balance plan can put a lifetime worth of savings in to your retirement!
    • 3 challenges with the Cash Balance plan that need to be considered when deciding if this plan is right for you!

CASH BALANCE PLANS: PROS & CONS

I want to focus on and really help you understand 3 pros and 3 cons that you need to be aware of so that you can weigh them and decide if this plan is right for you!

PRO #1: LOWERS YOUR TAXABLE INCOME & AGI

The cash bonus plan can potentially lower your taxable income and your AGI.  Let’s say that you are a consultant, you are a service business and you are very good at consulting. In 2019,

  • You make $450,000
  • You’re 58 years old and married
  • And you have a 401(k) plan and a profit-sharing plan

For your age, when you combine the profit sharing and 401k plan together, you can put up to as much as $62,000 inside of the 401k profit sharing plan for 2019!

When you stack a cash balance plan on top of that, you can put into your retirement accounts $261,000, getting you to a total retirement savings that year between all those accounts of $323,000.

Now you easily qualify for the QBI deduction. The taxable income is lower, your AGI is lower, you’re paying less in taxes to uncle Sam, and you got a tremendous benefit from doing that because you also have all this money that’s inside of your retirement accounts for you, when you transition in to retirement.

PRO #2: PUT A LIFETIME’S WORTH OF SAVINGS IN TO YOUR RETIREMENT IN 5-10 YEARS

The beauty of the cash balance plan is that it allows you to cram like a lifetime’s worth of saving into 5 or 10 years. You can potentially still build up $1 million or more inside of your retirement account, outside of the risk of your business, in those last few working years before you get to retirement.

PRO #3: A POWERFUL TOOL FOR SUCCESSION PLANNING

Maybe there’s a key employee or a family member who’s going take over ownership of your business. Typically, in those circumstances, it’s really challenging for the departing owner to get out of the business what they need in terms of value.

Let’s say your business is worth $5 or $15 million, but the owner taking over can’t afford to pay you that kind of money. The cash balance plan is a powerful tool to use for succession planning.

Here’s how it works: The business makes contributions to the plan and you can set this plan up so that only the departing owner is receiving any of this money. When it’s time for you to retire, you could have $1 million, $2 million in this cash balance plan… that helps to fund your exit!

In order to make this work, you have to pull some other levers and make higher contributions on behalf of other employees outside of the cash balance plan.

CON #1: IT’S RESTRICTIVE

The cash balance plan can be a bit restrictive in terms of the rules around it. One of those restrictive rules is that you have to make annual contributions to the cash balance plan. So these are ideal for a business that is less cyclical, more stable. You want to have a business where you are expecting it as a cash flow and the income to be relatively stable.

CON #2: WILL NEED TO HIRE AN ACTUARY

Cash balance plans are a little bit more complex than your typical 401k plans. There are some very special calculations that need to happen every year in order to stay in compliance. This means you’ll need to hire an Actuary which will cost you several thousand dollars- yearly.

When you’re considering the cost involved with the cash balance plan, try not to be penny wise and pound foolish. For most business owners who are utilizing this, it’s well worth the added expense.

CON #3: HIGHER EMPLOYEE CONTRIBUTIONS

Since you can use the cash balance plan to discriminate a little bit and you don’t have to include everyone, the trade-off for that is that you’re going to have to provide higher contributions to your rank and file employees then you would if you didn’t have the cash balance in place.

Don’t look at this as if you’re just shelling out a bunch of cash for your employees where you’re not benefiting as the owner. It’s the exact opposite. It’s a win, win for you the owner and your employees. They’re getting higher contributions on behalf of you as the employer than they otherwise would have and you’re potentially saving hundreds of thousands of dollars, if not millions over a 5-10 year period!

IS THE CASH BALANCE PLAN RIGHT FOR YOU? SCHEDULE A CALL

Hopefully this will provide you with more clarity around whether the Cash Balance plan is something that you should consider.

If you’re thinking:

  • This is intriguing
  • I would love to reduce my taxes and save a lot more for retirement
  • I’m close to retirement

Then schedule a 15 min. call with me.  I can answer any questions that you might have, and I will ask you a few questions to help you determine if a cash balance plan is right for you!

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ABOUT THE AUTHOR

ASHLEY M. MICCICHE, QPFC®, CRPC®, CEXP®

Ashley helps business owners exit their business and retire with financial security. As a Certified Exit Planner she specializes in helping business owners navigate the maze of decisions that need to happen from full-time running their business to retirement.

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