The Benefits of Cash Balance Plans

Source: Journal of Accountancy

In this article, Allison Evans, CPA, Ph.D., and James Irving, CPA, Ph.D., explain why a cash balance plan is a good retirement investment option for unincorporated, flowthrough businesses — particularly since the tax burden on these entities has increased in recent years. Cash balance plans are proving to be particularly appealing to professionals such as doctors, dentists, lawyers, and accountants. 

Benefits of cash balance plans:

• Because they're defined benefit plans, contributions are not capped, as they are with 401(k) and profit-sharing plans. Instead, the limit for a cash balance plan, currently $210,000, is placed on the annual payout.
• Participants might choose to invest three to four times the amount they could put into a 401(k), which could substantially lower annual taxable income.
• Employees can invest in cash balance plans as well as in 401(k) and profit-sharing plans.
• Accumulations are calculated yearly, and a statement is given to the participant and the firm, which provides payout certainty. And professionals who leave the firm can take their cash balance plan investments with them.
• They enable firms to invest a percentage or a specific dollar amount annually for owner-employees. This enables the firm to invest according to how much time owner-employees have until retirement.
• The flexibility of investing larger amounts (based on the current $210,000 per year retirement payout) is beneficial to professionals who spend seven or more years in school and are unable to start their retirement savings until later in life.

For the complete article, read “Cash balance plans for professional practices.”

From Journal of Accountancy, March 2015, www.journalofaccountancy.com/Issues/2015/mar.