Cash Balance Plan Case Study

June 1, 2020 | Josh Zorger, CFP®, Fortitude Private Wealth


The following is a case study describing how a self-employed business owner was able to implement new retirement plan options to increase their total retirement plan contributions. This business owner works as a consultant and averages around $500,000 per year in total business revenue. The type of business is an S-Corporation that pays the business owner a total W2 of $150,000 per year. The business has no W2 employees but does have two 1099-Independent Contractors. The total expenses for the business average $125,000 per year. As a result, this business owner has a Net Income of over $200,000 per year.

For many years, this business owner has been contributing to a SEP IRA or a Simplified Employee Pension. The SEP contribution cannot exceed the lesser of 25% of the employee’s compensation for the year or $57,000 for 2020 ¹. In this example, the business owner would be able to contribute only 25% of their compensation or $37,500 to the SEP IRA. The business owner would like to maximize their pre-tax retirement contributions at $100,000 per year. How can they accomplish this?

This business owner should consider implementing the following plan to help them accomplish their goals. First, they should consider starting a Solo 401(k) Plan, which would allow them to make an employee contribution of $19,500 for 2020 ². This $19,500 is contributed on a pre-tax basis and is a deduction from Federal and State Income Taxes on their W2. Second, they should add Profit Sharing as a feature to the 401(k) Plan, which would allow an additional contribution of $37,500. Because this Profit Sharing contribution will be made by the business, it is treated as a business deduction on the S-Corporations tax return.

Finally, this business owner should analyze different options for adding a Cash Balance Plan. This business owner had the objective of saving a total of $100,000 to their retirement plans. Through planning and collaboration with the business owners advisors, including their accountant and a Qualified Retirement Plan consultant, the business owner was able to increase their total retirement plan contribution from $37,500 per year to $107,000 per year utilizing a Solo 401(k), Profit Sharing and Cash Balance Plan. An S-Corporation is considered a pass-through entity by the IRS, so all income from the business flows to the business owner's individual tax return and is taxed at the individual’s tax rate. Because this business owner was in the 35% Federal Tax bracket, the increased retirement savings amount saved them an additional $24,325 in Federal Taxes per year ³. In addition to the tax savings, the added retirement savings should also help them achieve their retirement goals at an earlier age.

This information should be used for educational purposes only and is not intended to be specific investment planning, retirement planning or tax planning advice. We recommend that you consult with a professional tax advisor or qualified plan consultant before implementing any of the options presented.

¹ Per IRS Section 415(c)(1)(A) the total contribution limit for both employee and employer contributions to 401(k) Defined Contribution Plans increased to $57,000 in 2020 and to $63,500 for plan participants age 50 and older.

² The maximum elective deferral for contributions to a Defined Contribution Plan for 2020 is $19,500. For participants who are over the age of 50, they can make an additional Catch-Up contribution in the amount of $6,500. So, participants over the age of 50 can contribute a total of $26,000 to a Defined Contribution Plan for 2020.

³ The Federal Income Tax savings was calculated by multiplying the additional retirement plan contribution of $69,500 by the tax rate of 35%, which is $24,325. 

Josh Zorger, CFP®, is the founder and president of Fortitude Private Wealth in Carmel, IN.

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