Could an additional pension deduction help you? It could put extra cash in your retirement bucket – no magic wand needed! It happens when a cash balance plan is placed on top of a 401(k) pension/profit sharing plan for eligible individuals.
What is a cash balance plan? In layman’s terms, it is a relative of the defined benefit plan with more flexibility. It looks somewhat like a 401(k), but is an additional qualified plan that sits side-by-side with a profit sharing plan or 401(k). Contributions to Cash Balance Plans have the same tax effect as a deduction that reduces ordinary income dollar for dollar. Just as a Profit Sharing feature can be added to a 401(k) plan, an employer can add a Cash Balance Plan as well. There are many similarities but the difference is that contributions grow at a guaranteed percentage, and the participant does not exercise investment control.
In a Cash Balance Plan each participant has an account. The account grows annually in two ways: first, a contribution and second, an interest credit, which is guaranteed rather than being dependent on the plan’s investment performance. Since a cash balance plan favors older and higher-compensated participants, it is ideal for many professional practices and small business owners. The rules are complex, so you will need the assistance of your TFG Financial Advisor. The design of the plan can be customized to fit your unique situation.
Even in a practice with many professionals getting similar paychecks, a few can opt out of the plan and the remaining individuals can decide on differing levels of deferral to meet their own personal situation and savings goals.
To take advantage of this for the 2021 tax year, the plan documents have to be filed before October along with an initial contribution. The plan does not have to be fully funded until you file your taxes for the next year.
Contact Us: Perhaps a traditional defined benefit plan will work better for you in your situation, but you owe it to yourself to examine the option of a cash balance plan more closely. Many owners and partners are looking for larger tax deductions and accelerated retirement savings. Cash Balance Plans may be the perfect solution for them. Our financial advisors would be happy to discuss some scenarios with you. When the costs and benefits are laid out, you can make an educated decision.
At TFG, we understand that small business owners and professional practitioners may be concerned about cash flow and saving enough for retirement. Feel free to contact me, Cory Lyon, directly at 561-209-1120, with any questions regarding the right retirement strategy for you. I act as a fiduciary for all my clients.
TFG Financial Advisors, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities, and past performance is not indicative of future results. Investments involve risk and are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here.
