Defined benefit and cash balance plans – the “new” way to generate high tax deductions in your dental office
A plan that could make sense for you
High net-worth individuals have a constant need to maximize their bottom line. One effective way to accomplish this is to generate higher tax deductions. A properly designed retirement plan plays an important role in helping you shield more of your income from the tax collector, while also increasing retirement savings.
Cash balance and defined benefit plans enable successful business owners to keep more of their income while providing an enhanced retirement benefit.
For the sole proprietor who would like a tax deduction greater than the 25%/$49,000/$54,500 annual maximum allowed in a defined contribution plan, adding a traditional defined benefit plan can generate significantly greater contributions and tax benefits for the sole proprietor.
For the owner of a successful business with two or more employees, the addition of a cash balance plan can not only allow reductions in overall staff pension costs, but also increase the owner’s own retirement savings and significantly boost tax deduction.
A cash balance plan is a defined benefit retirement plan with an unusual contribution feature. It can be used by the business owner to benefit key employees, and to make deductible contributions greater than the maximum annual amount that can be made on behalf of a participant in a defined contribution plan (currently $49,000 and $54,500 for participants older than 50). Maximum contributions in a cash balance plan depend on the age and compensation of an individual, with allowable annual contributions sometimes as high as $200,000. The older the individual, the sooner the assumed retirement age and the higher the potential benefits. The ultimate benefit is dictated by the terms of the cash balance plan, with the business owner responsible for all investment returns.
If you already have a 401k plan, this is a good time to see if adding a defined benefit plan or a cash balance plan makes sense for you.
Tom Zgainer has extensive experience in the 401k industry serving as Senior VP of Sales and Business Development at ExpertPlan. He played an integral role of building the Personal Capital 401k. Feel free to reach out to Tom at firstname.lastname@example.org for help with your 401k plan or other retirement advice.