Cash Balance Plans
Business owners are using Cash Balance Plans to significantly reduce income taxes and supercharge retirement savings.
Who is it for? Business owners with <5 employees, high income, high savings rate, and have already maxed out their 401k and IRA.
Advantages of a CBP:
1) Contributions are 100% tax-deductible. This creates big tax savings by lowering your taxable income today.
2) Higher contribution limits, up to $275,000 in 2024.
3) CBPs can be stacked on top of other retirement plans, like your 401k and IRA.
4) The CBP is invested in low-cost index funds and grows tax deferred.
Disadvantages of a CBP:
1) CBPs require quarterly funding payments into the plan. You must commit the same % of income or $ amount each year, during the life of the plan.
2) The money in the CBP is locked up for the life of the plan, typically 7-10 years.
3) You may be ineligible to receive additional “employer matching” or “profit sharing” contributions in your 401k, after hitting the $23k cap.
4) There are substantial administrative requirements based on the terms of your plan, including annual actuarial calculations, required annual funding, and filing fees for IRS Form 5500.
How to get the money out of a CBP:
1) Rollover the money into an IRA, and it will remain tax-deferred until you withdraw it. This may allow for more flexibility, as distributions from the IRA aren’t required until RMD age.
2) Lump-sum distribution payable to you. You can take a lump-sum distribution for the full amount of your benefit. However, the amount is taxed immediately, and a 10% penalty may apply if you’re under age 59½ at the time of the distribution.
3) Set up an annuity. You can pay yourself a monthly benefit from the plan over your lifetime. This requires maintaining your CBP indefinitely, so it may not be practical for many people. You could also purchase an annuity after rolling over the assets into an IRA.
If you have questions on how a Cash Balance Plan can reduce your income taxes and supercharge your retirement savings, click Book A Meeting
