Updated 1/1/2019: Our previous post defined cash balance plans and explained their structure and how they work. Now let’s focus on the key advantages of using a cash balance plan, and who are its primary candidates. As a financial advisor you’ll want to understand these points so you can share them with your clients and prospects who want to save more for retirement and who are looking for ways to decrease their current tax liability

Yin-yang-CBP-401kCash Balance Pension Plans have become increasingly attractive in recent years to business owners seeking greater wealth accumulation for retirement. These owners are finding that cash balance plans provide certain advantages not offered by other plan types, such as:

  1. Compared to a single 401(k) profit sharing plan, which limits the annual contribution on behalf of any single participant to $56,000 per year ($62,000 for those over age 50 in 2019), a cash balance plan, in conjunction with a profit sharing plan, will generally provide much more generous annual allocations.
  2. In general, as a business owner ages, he may allocate a larger amount to his cash balance plan account, because there are fewer years of contributions and investment returns available to accumulate the maximum benefits allowed at retirement age. However, even owners in their mid-30s can take advantage of cash balance plans and accumulate annual benefits exceeding the 401k/profit sharing limit.
  3. In addition to the 401(k)/profit sharing allocation, owners may generally receive an additional allocation of $75,000 to $260,000 per year, depending upon their age, compensation and other government compliance considerations.
  4. The use of a cash balance approach generally allows for much greater disparity in benefits between owners and staff than a single 401(k) profit sharing plan does. This is because of the allowable testing mechanisms used to demonstrate that the plans do not discriminate in favor of highly compensated employees.

Who is a good candidate is for a cash balance plan? There are two answers to this question:

  • Anyone currently allocating the maximum $56,000 limit to a 401k/profit sharing plan and wants to save more, or,
  • If they don’t have a plan, generally owners who are making more than $200,000 a year and who are looking for ways to save on taxes and accumulate long-term wealth.

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Although these plans are ideal for doctors and attorneys, they also work great for sole proprietors, consultants, authors, insurance agencies, plumbing companies, etc. The industry type doesn’t matter; the real question is, Can they afford to save more?

These are just some of the advantages of a cash balance plan over most other types of retirement plans. Our next post will explain more advantages, including why a cash balance plan’s benefits are often easier to understand.