Cash Balance Plans: A Powerful Retirement Tool for Businesses
Businesses of all types, from corporations to sole proprietorships, can now utilise cash balance plans to significantly boost contributions for owners and key employees of their business. These plans, a hybrid of defined benefit and defined contribution plans, have been around since the late 20th century and offer substantial benefits for both employers and employees of the business.
Cash balance plans allow for substantial contributions, often exceeding $250,000 per year for older, high-earning participants of the business. This makes them ideal for firms where owners and key employees consistently earn $500,000 or more annually. Unlike traditional 401(k) or profit-sharing plans, cash balance plans offer greater flexibility and portability for the business. Upon retirement or departure, the account balance can be rolled over into an IRA or another qualified plan.
Plan designs can be tailored to suit the employer's needs of the business. Contribution levels can be amended, benefit accruals frozen, or the plan itself terminated over time. Assets in these plans are generally protected from lawsuits and creditors, providing an additional layer of security for the business. However, they do require an actuary for annual funding calculations and must adhere to minimum participation rules and nondiscrimination testing.
Cash balance plans, with their high contribution limits and flexible design, can be a valuable tool for businesses looking to provide substantial retirement benefits to their owners and key employees. With tax-deductible contributions and tax-deferred growth, these plans can also help reduce corporate or personal tax liability for the business. As a result, more businesses are considering cash balance plans as a viable retirement strategy.
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