Cash Balance Pension Plans

Cash balance plans, a type of defined benefit plan, certainly offer a number of tax advantages, which make them a compelling choice for business owners like yourself. Here are the key advantages you should be aware of:

• Pre-Tax Contributions:?Much like other retirement plans, the contributions you make to a cash balance plan are made pre-tax, meaning the money isn't subject to federal or state income tax when it's contributed. This may significantly reduce your taxable income for the year and thus your overall tax burden.
• Tax-Deferred Growth:?The investments within the cash balance plan grow tax-deferred. This means that you won't have to pay taxes on the interest, dividends, or capital gains accruing within the plan until you begin to take distributions in retirement. This allows your investments to compound over time without the hindrance of annual tax.
• Higher Contribution Limits:?Unlike traditional 401(k)s and IRAs which have relatively low contribution limits, cash balance plans allow you to possibly contribute significantly more money each year. For business owners, especially those(delete) closer to retirement, this allows for rapid accumulation of retirement savings, all of which is(delete) are tax-deferred.
• Business Expense Deduction:?From a business perspective, the contributions the business makes to a cash balance plan are considered a business expense. This can be deducted from the company's income, reducing its tax liability.
• Creditor Protection:?While not a tax advantage, it's worth noting that cash balance plans, like other qualified retirement plans, generally provide strong protection from creditors, depending on the state. This is another important consideration for business owners when planning their retirement strategies.

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Let's use a hypothetical scenario involving a 50-year-old business owner, Jane, who is seeking ways to maximize her retirement savings.

Jane has already maxed out her 401(k) contributions for the year. She's interested in exploring other tax-advantaged strategies, and a cash balance plan appears to be a good fit for her needs. Jane is in a high income tax bracket, and she has the capacity to save an additional $250,000 each year towards her retirement.

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In a cash balance plan, Jane's contributions and the eventual payouts are determined by a formula based on her age, income and years of service. With a properly structured cash balance plan, she could potentially contribute the $250,000 per year into the plan. This amount is tax-deductible for Jane, meaning she can lower her current year's tax bill significantly by making this contribution.

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As an example, if Jane falls in the 37% federal tax bracket, her contribution could save her $92,500 on her federal income taxes for that year (37% of $250,000). This doesn't even account for potential state income tax savings, which would provide further tax reduction.

The money in the cash balance plan would then grow tax-deferred. For the sake of the example, let's assume Jane's plan averages a 5% rate of return per year. Without having to worry about capital gains or dividend taxes along the way, the compounding effect on this tax-deferred growth could significantly increase the value of her retirement savings over time compared to a taxable account.

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Keep in mind that, like with all defined benefit plans, cash balance plans require a commitment to fund the plan each year and the costs of setting up and administering these plans can be higher than other retirement savings vehicles. It's also important to note that once distributions are taken in retirement, they will be subject to income tax.

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As always, I strongly recommend discussing these strategies with a tax professional to ensure you are fully informed about your individual situation. Is there anything else you'd like to know about cash balance plans or other retirement strategies?

Securities and Investment Advisory?Services offered through Fortress?Private Ledger, LLC. ?Member?FINRA/SIPC