Submitted by Susan Powers on November 11, 2019
It’s a great question. Cash balance plans continue to be the fastest growing type of retirement plan for several reasons and yet too few business owners are being made aware of them. The December 31st deadline to establish a cash balance plan is quickly approaching but you still have time if they are attractive for you.
What is a Cash Balance Plan?
A cash-balance plan is a defined benefit plan with a twist; benefits are stated as a 401(k)-style account balance, rather than a monthly income stream. Like a pension plan though they have substantially higher contribution limits. Not only are contribution limits higher, they also increase with age. For a 50-year-old, the cash-balance contribution limit is $158,000, while a 60-year-old's limit is $261,000. If you are able and interested in saving more than allowed with a 401(k)/SEP only, a cash balance plan may be right for you.
The typical cash balance clients have been medical/dental groups and law firms, but more business owners are discovering the benefits and turning to these plans to turbocharge their retirement savings and take advantage of generous tax deductions.
What makes them so attractive?
- Higher contribution limits, much higher than allowed with just a 401(k) or SEP
- Tax-deductible contributions and your money grows tax-deferred
- Reasonable costs to setup and administer