Powerful Option to Help Clients Lower Tax Bills, Raise Retirement Savings

It’s not surprising that at this time of the year, business owners are looking for ways to lower their tax bills. At the same time, high wage earners may be bracing for tax increases proposed by the Biden administration. Also on their minds? Options to help them raise their retirement plan savings.

If you have clients who fit this description, here’s a powerful solution — a cash balance plan.

Think of a cash balance plan as a hybrid retirement plan. It combines the account balance features of a defined contribution plan with the higher contribution and deduction limits of a pension plan. Like a 401(k) plan, cash balance plans are considered qualified plans, because they’re eligible for tax deferral and creditor protection. The plan contributions are employer-funded based on the levels determined by them.

Here are some of the biggest benefits for business owners:

Higher contribution limits. Participants enjoy contribution limits based on age. For example, in 2021, a 55-year-old could contribute up to $207,000 to an individual cash balance account. That person’s contribution limit to a 401(k) account would be only $26,000 ($19,500 contribution limit + $6,500 catch-up contribution).

Tax deductions. Business owners can deduct contributions to their own account and to their employees’ accounts from their business income.

Tax-deferred earnings. Participants enjoy tax-deferred earnings until they begin withdrawing assets during retirement.

Who may have the most to gain from a cash balance plan?

• A business owner looking for additional tax savings and wealth accumulation
• A business owner over 50 with some younger employees
• A business owner making more than $250,000 per year
• A business owner willing to contribute 7% to 10% of pay annually to the plan for full-time rank-and-file employees

Consider This Hypothetical Scenario
for a 55-Year-Old Business Owner:

This example is hypothetical and for illustrative purposes only. It assumes that the business has a 401(k) plan with a profit-sharing and cash balance plan. The tax savings estimate is based on a 42% combined rate for federal and state laws.

Actual tax savings will vary based on your situation.

Offering a cash balance plan can give business owners a compelling way to recruit and retain employees, and help them save more for retirement. It’s an unexpected option for some small business owners, who may struggle to attract the best and brightest employees.

With a cash balance plan in place, employees can experience advantages, too:

• Employees don’t have to fund their plan, and employers cover all plan costs.
• Cash balance plans are easy to understand and present no investment risk to the employee.
• Account balances are portable and may be covered by the Pension Benefit Guaranty Corporation.

Talking to clients about the advantages of a defined benefit plan is always a good idea. And demonstrating your expertise in cash balance plans can set you apart and help you deepen business relationships. It gives you an opportunity to offer clients more than a 401(k) and showcases your value.

And when you work with the right partner, like The Standard, you can consult with a team of cash balance experts who can help you deliver this solution to your clients.