Cash balance plans, or hybrid retirement plans, are defined benefit plans that are similar to defined contribution plans, but offer much higher annual contribution limits. They’re ideal for owners of professional service businesses, such as attorneys, doctors, and dentists, because these taxpayers traditionally make much higher-than-average incomes but aren’t able to begin saving significantly for retirement until later in life.
Journal of Accountancy recently explained how cash balance plans can help professional service businesses.
Since cash balance plans are defined benefit plans, contributions aren’t subject to the caps placed on retirement plans. Instead, there’s a limitation on the annual payout at retirement ($210,000 as of 2015).
These plans are popular with professional service company owners because they allow them to grow income tax-deferred by investing into a cash balance plan in a given year with a corresponding decrease in salary that will save current tax dollars. The professional practice credits either a percentage of salary or a fixed dollar amount each year to an owner-employee’s account. Using an actuary, they can work backward from the maximum defined benefit for a given individual (a $210,000 life annuity as of 2015) and spread it over the remaining period of employment.
Although cash balance plans can be expensive to administer, they’re worth it for high-income individuals who need to save large sums over a fewer number of years. They also require that payments be made into them every year, so they’re best for practices that have reliable cash flow.
If you have questions about whether a cash balance plan would be a good choice for you, give me a call at (864) 836-3136 and we’ll set up a time to talk.