Who does a cash balance plan make sense for?

Cash balance plans are a great way to save for retirement while reducing taxes. As a business owner or self-employed individual, if you are making a lot of money and contributing the maximum allowed to a 401k ($58,000 +$6,500 if age 50+), this could be a good option to consider.

What is a cash balance plan considered?

A cash balance plan is a twist on the traditional pension plan. Like a traditional pension, a cash balance plan provides workers with the option of a lifetime annuity. However, unlike pensions, cash balance plans create an individual account for each covered employee, complete with a specified lump sum.

What is the purpose of a cash balance plan?

A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan. In other words, a cash balance plan defines the promised benefit in terms of a stated account balance.

Can a cash balance plan be invested?

Unlike in a 401(k) plan, the assets in a cash balance plan are not maintained in separate accounts for plan participants, and participants cannot direct their own investments.

How much can I put in a cash balance plan?

While SEPs and 401(k)/profit sharing plans – as defined contribution retirement plans – limit total annual contributions to $58,000 (indexed), annual contributions to a cash balance plan generally depend on the owner’s age and income and often exceed $200,000.

How do you calculate cash balance?

You get that by adding money received and subtracting money spent. Cash balance is the amount of money on hand. You get that by taking the previous month’s cash balance and adding this month’s cash flow to it — which means subtracting if the cash flow is negative.

Are there any tax benefits to a cash balance plan?

Contributions are tax deductible because a cash balance plan is technically a defined benefit plan. So if you are looking for a retirement plan that will allow for significant contributions along with tax deductions, a cash balance plan may make sense. What are the tax benefits?

How are cash balance plan contributions reported on a corporate tax return?

Recording your cash balance plan contributions on an S corporate return is a little more straightforward. Similar to so proprietorships, there is a line on the tax return that is called pensions profit sharing and retirement accounts. All contributions to plans no matter if they are for the business owner or for employees are reported on this line.

What does it mean to defer taxes on a cash balance plan?

Tax deferral simply means you elect to defer paying taxes on the amount you contribute to the pension plan. While most retirement plans have limits on how much you can contribute, a cash balance plan has a relatively higher potential contribution limit. This allows you to defer taxes paid now until you are eligible to withdraw the funds.

How is a cash balance pension plan different from a defined contribution plan?

In a defined contribution plan, the actual amount of retirement benefits provided to an employee depends on the amount of the contributions as well as the gains or losses of the account. A cash balance plan is a defined benefit plan that defines the benefit in terms that are more characteristic of a defined contribution plan.