Cash Balance Plan Case Study

January 1, 2024 | Josh Zorger, CFP®, Fortitude Private Wealth


The following is a case study describing how a self-employed business owner was able to implement new Qualified 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 total wages of $150,000 per year, which is reported by filing a W2. The business has no additional 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 amount 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 $69,000 for 2024 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 a pre-tax employee deferral of $23,000 for 2024 ². This $23,000 is contributed on a pre-tax basis and is a deduction from Federal and State Income Taxes reported on their W2. Second, they should add Profit Sharing as a feature to the Solo 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. The combined total contribution for Solo 401(k) Plan and Profit Sharing would be equal to $60,500.

Finally, this business owner should analyze different options for increasing their total retirement plan contribution to accomplish their goal of savings $100,000 per year on a pre-tax basis. One Qualified Retirement Plan option to consider would be adding a Defined Benefit Plan or Cash Balance Plan. Through planning and collaboration with the business owner’s advisors, including their accountant and a Qualified Retirement Plan consultant, the business owner discovered that they could make an additional contribution of $50,000 per year to a Cash Balance Plan. This contribution will be made by the business and will be treated as a business deduction on the S-Corporations tax return.

As a result of proper planning, this business owner was able to increase their total pre-tax retirement plan contributions from $37,500 per year to $110,500 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 lowered their total Federal Taxes from $82,871 to $66,381, which saved them a total of $16,490 in Federal Taxes ³. In addition to the tax savings, the added retirement savings might also help them achieve their retirement goals at an earlier age. If you would like more information on how Fortitude Private Wealth helps business owners accomplish their retirement savings goals, please contact our office today.

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. Specific tax savings will be different depending on everyone’s specific tax situation. There is no guarantee that adding a 401(k), Profit Sharing or Cash Balance Plan will help an individual’s tax situation or lower their tax liability.

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 $69,000 in 2024. For plan participants age 50 or older who can make catch-up contributions, the maximum contribution is $76,500 for 2024.

² The maximum elective deferral for contributions to a Defined Contribution Plan for 2024 is $23,000. For participants who are over the age of 50, they can make an additional Catch-Up contribution in the amount of $7,500. So, participants over the age of 50 can contribute a total of $30,500 to a Defined Contribution Plan for 2024.

³ For this example, the Federal Income Tax savings was calculated assuming that the business owner’s filing status was Single, no additional income was received, and the Standard Deduction was utilized. Specific tax savings will be different depending on everyone’s specific tax situation.

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

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