It’s All About How Much You Save!
As a business owner, it may be time to play catch up with your retirement plan. Adding a Cash Balance Pension plan to your Profit Sharing 401(k) plan can significantly increase your ability to save for retirement and also lower your current tax liability and get you back on the right track for a comfortable retirement.
With potential tax savings of over $100,000 per year, it’s surprising that more business owners don’t take advantage of cash balance plans. Securing a strong retirement for high-earning business owners may come down to this technique.
Retirement Challenges
I think we can all agree, running a business is stressful and cash flow is a critical consideration. The end game for many business owners is to be set for life by monetizing the value of the business. Unfortunately, the reality is that many businesses don’t sell for the value the owner expects and, oftentimes, there is not enough value after taxes to allow for the comfortable retirement they anticipated.
So getting serious about saving and playing catch up with your money is the way to thrive in life after you’ve left your business. To make things even better, minimizing the tax bite will allow the process to work more efficiently.
Retirement Plan
When you own a business, there are numerous ways to save for retirement, but it’s important for you to choose the plan that is best suited for you and your retirement goals. Traditional IRAs, Roth IRAs and SEP IRAs are still used by business owners, but 401(k) plans are also a popular choice because of their higher contribution limits and generally lower investment costs. If you’re looking to put even more money away into tax deferred accounts while minimizing taxes, you should also consider a Cash Balance Plan. Of course, if you have employees, considering the cost of contributions for your employees is also important. The coverage rules that apply to 401(k) retirement plans also apply to cash balance plans. Make sure you work with a reputable plan consultant to design the plan in a way to minimize the employee cost.
- Cash Balance Plan plus 401(k) – This combination is when a business combines a cash balance pension plan with its 401(k) plan. When this is executed correctly, business owners save thousands of additional dollars every year. On top of that, these contributions are tax deductible by your business.
Should You Consider This Plan?
The Cash Balance Plan is a perfect fit for older business owners nearing retirement with lots of discretionary cash flow and looking to play catch up with their retirement savings or just trying to maximize current tax deductions. It also allows greater flexibility in succession planning. Cash balance plans do not impact the future value of the business because owner compensation and benefits are normalized in the valuation process. By using a cash balance and a 401(k) plan, older owners may be able to save well over $150,000 per year for retirement.
Ask For Assistance
When it comes to having a strong retirement, it’s not about what you make but what you save. Retirement strategy should be a year-round job because the costs of poor planning could be disastrous. That being said, please email Rea & Associates to learn more about the Cash Balance Plan 401(k) and whether it makes sense for you and your business.
By Paul McEwan, CPA, MTax, AIFA (New Philadelphia office)