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Fortitude Private Wealth

A Cash Balance Plan may be one of the most appropriate strategies available for a Small Business Owner to save more income on a pre-tax basis, while also potentially reducing their personal income taxes.

A Cash Balance Plan is a Qualified Retirement Plan that offers tax deferral and creditor protection under ERISA. Because of Legislative changes in 2006, 2010 and again in 2014, these plans have seen remarkable growth in the last decade.¹

One common qualified retirement plan is a 401(k) plan, which is known as a Defined Contribution Plan. The employees of a company with a 401(k) plan are eligible to make pre-tax contributions to the plan. The limit in 2016 for these employee contributions was $18,000. If over the age of 50, this employee contribution can be increased to $24,000.

If a business owner would like to increase their pre-tax retirement savings above $18,000, they could add a Profit Sharing option to the company 401(k) plan. The total 2016 annual contribution limit for a Defined Contribution Plan with Profit Sharing is $53,000.² By combining the $18,000 employee contribution with a $35,000 Profit Sharing contribution made by the company; a business owner could achieve the maximum contribution.³ A best practice rule to follow before setting up a qualified retirement plan is for the business owner to consult with a personal tax advisor and qualified retirement plan consultant.

What if a business owner wants to contribute over $53,000 to a retirement plan? A business owner may have the option of increasing their pre-tax retirement savings significantly utilizing a Cash Balance Plan. A Cash Balance Plan is a Defined Benefit Plan where all plan contributions are made by the company. Because the company is making the contribution to the plan, the owner of the company will have a lower amount of taxable income.

There are several factors that determine how much a business owner can contribute to a Cash Balance plan. One factor is an age-weighted limitation. For example, a 40 year old business owner could contribute up to $80,000 per year to a Cash Balance Plan.⁴ This $80,000 contribution is in addition to the contribution made to the Defined Contribution Plan. If this business owner is able to maximize both the Defined Contribution Plan with Profit Sharing and the Defined Benefit Plan contribution amounts, then they could contribute $133,000 to their retirement accounts.  Because the Cash Balance contribution limits are age-weighted, a 50 year old could contribution $137,000 to a Cash Balance Plan for a total contribution of $196,000 total to all retirement plan types.⁴

When analyzing the options for these types of plans, it is highly recommended to consult with a personal tax advisor and with a qualified retirement plan consultant. These tax and retirement plan consultants should be able to help you crunch the numbers and weigh your options to see what is in the best interest of your company.

¹ 2016 Kravitz National Cash Balance Research Report
² Per IRS Section 415(c) (1) (A)
³ Profit Sharing contribution limit is 25% of compensation up to $53,000; approximately 20% for sole proprietors (due to self-employment deduction).
⁴ Source:

For Plan Sponsor Use Only – Not for Use with Participants or the General Public

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

LPL Financial Certified Financial Planner Fortitude Private Wealth
600 E Carmel Drive, Ste #159
Carmel, IN 46032
Phone: 317-819-8550

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