Is a Cash Balance Plan Right for You?

Jay D. Franklin, CFA, CFP, FSA | Clarity Capital Advisors |

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Need more tax deferrals while maximizing retirement savings? Consider a cash balance plan which is distinguished from a traditional defined benefit pension plan through its “hybrid” structure. Each participant has an account with a balance that reflects employer contributions and credited interest applied at a guaranteed rate which may differ from the rate of return earned on the underlying investment portfolio. The investments are normally managed to achieve returns as close as possible to the credited interest rate.

When participants terminate employment, they are eligible to receive the vested portion of their account balance. As of 2019, The maximum allowable account value is the amount required to purchase an annuity to provide an annual income of $225,000 at retirement, about $2.8 million. An annuity is seldom purchased in reality, as the balance is usually transferred to a rollover IRA.

A cash balance plan can be considered as the next step after maximizing 401(k) or SEP IRA contributions. For example, a 50-year-old who contributes a total of $62,000 to his/her 401(k) in 2019 can also potentially contribute up to $158,000 to a cash balance plan, for a total of $220,000 completely tax-deferred. Under the new tax law, it gets even better for owners of LLCs, partnerships, and other pass-through entities who are now eligible to deduct 20% of their qualified business income up to $315,000 (it phases out up to $415,000).

Here are some ideal candidates for cash balance plans according to Kravitz, Inc., a specialist in the field:

  1. Principals seeking a tax deduction of more than the 401(k)/SEP IRA maximum or making more than $250,000 per year
  2. Highly profitable companies of all types and sizes
  3. Successful family businesses and closely held businesses
  4. CPA and law firms, medical groups and professional firms
  5. Older owners who need to squeeze 20 years of retirement saving into 10

If you believe a cash balance plan may be right for you, please call us at 800-345-4635 or email us at to receive a proposal. We look forward to helping you save more for retirement while reducing your tax bill.