Cash Balance Guidebook

Cash Balance for Small Businesses

Retirement planning for small business owners offers unique opportunities to maximize savings, optimize tax strategies, and secure financial stability for the future. One of the most powerful tools available to small business owners generating $1 million or more in annual revenue is the Cash Balance Plan, especially when combined with a traditional 401(k). These plans can offer significant tax-deferred savings, potentially allowing individuals to put away up to $485,500 each year depending on their age.

Whether you’re looking to minimize taxes, maximize your retirement savings, or provide meaningful benefits to your employees, a cash balance plan could be the solution you’ve been searching for.

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Cash Balance Guide

What is Cash Balance Plan?

A Cash Balance Plan is a type of defined benefit retirement plan that acts similarly to a pension. Unlike a traditional pension plan, which promises a specific payout in retirement, a cash balance plan credits a participant’s account with a set percentage of their salary each year, along with interest credits. Essentially, it combines the best features of a pension and a 401(k) plan.

These plans are particularly beneficial for high-income earners, such as small business owners, because they allow for much higher contribution limits than traditional retirement savings vehicles like a 401(k). The contribution limits can vary based on factors such as age, but business owners over the age of 50 can often contribute hundreds of thousands of dollars to their cash balance plan each year.

How Does a Cash Balance Plan Work?

A cash balance plan is funded by employer contributions, which are based on a set formula. The plan defines both an employer contribution and an interest credit rate. These contributions are placed into individual accounts for each participant. As an employer, you can set up these plans to favor key employees or owners (within legal limitations), and the contribution amounts can be adjusted depending on your cash flow and business performance.

Here’s how a cash balance plan typically works:

Annual Contribution

You contribute to the plan annually. Contributions are determined based on a percentage of the employee’s salary or a set dollar amount. The contribution limit increases as the employee gets older.

Interest Credits

The account balance receives an interest credit, which can either be a fixed rate (for example, 5%) or a variable rate tied to an index like the 30-year Treasury bond rate.

Distribution at Retirement

When you retire or leave the business, the balance in your cash balance account can either be paid out as a lump sum or as an annuity over time. The distribution will be taxed as ordinary income, just like with a traditional 401(k) or IRA.

Download the Cash Balance Guide

To learn more about how a cash balance plan can help you unlock huge tax savings while building a secure retirement, download our comprehensive Cash Balance Guide. This guide provides detailed insights into the benefits of cash balance plans, eligibility criteria, and how to set up a plan that works for you.