Beyond the 401(k): How Cash-Balance Plans Maximize Savings

By: Larry Lubin and Kevin Bewley

In today’s complex world of retirement planning, cash balance plans stand out as one of the most effective ways for high-income earners, business owners, and professionals to secure a robust financial future while minimizing taxes.

What Is a Cash Balance Plan?

Cash Balance Plans blend the structure of a traditional defined benefit pension with some flexibility found in defined contribution plans like 401(k)s, offering a win-win for the right individuals.  Depending on factors such as age, income, and plan design, high-income earners may be able to contribute several times more annually than the typical 401(k) limit of around $70,000.  These plans are best suited for sole proprietors, closely held business owners, and high-income professionals.

Key Benefits

1. Higher Contribution Limits: Contributions to a cash balance plan can far exceed 401(k) limits, reaching several hundred thousand dollars annually for older, high-income earners.

2. Tax Advantages: Contributions are tax-deductible and grow tax-deferred, helping business owners and high-income earners reduce their immediate tax burden.

3. Predictable Retirement Income: The defined benefit structure ensures stability and predictability in retirement income.

4. Portability: Account balances are portable, allowing participants to roll over funds into an IRA or another qualified plan if they leave the company.

   
   

Supercharging Cash Balance Plans with Life Insurance

Adding life insurance to a cash balance plan can be a savvy strategy for those interested in maximizing retirement or estate planning benefits, or both. Here’s how it works:

• Bigger Tax Deductions: Contributions used to fund cash balance plans are tax-deductible, and the inclusion of life insurance can increase the overall contribution limits even further.  

• Future Tax-Free Benefits: After five to seven years of funding, the policy can be purchased by the individual's trust, enabling access to tax-free retirement income through withdrawals or loans, as well as the ability to pass on a tax-free death benefit to beneficiaries.

• Legacy Planning: Life insurance, purchased within a Cash Balance Plan, can secure a significant, tax-advantaged inheritance for heirs.

Who Benefits the Most?

Cash balance plans are a game-changer for professionals and business owners who have maxed out other retirement savings vehicles. They’re particularly beneficial for:

• High-income earners seeking additional tax-advantaged retirement savings options.

• Individuals of any age looking to maximize qualified retirement contributions.  Those nearing retirement benefit the most due to significantly higher allowable contribution limits.

• Business owners, especially those with a favorable employee-to-owner ratio, who want to accelerate retirement savings and reduce taxable income.

Tailoring the Plan to Fit You

One size doesn’t fit all when it comes to cash balance plans. Each plan should be carefully customized based on business structure, cash flow, and long-term goals. Plans are closely monitored and can be paused, amended, or terminated as needed to meet your evolving needs. This flexibility ensures tailored contribution levels and plan designs that adapt to changing circumstances.

Is It Right for You?

If you’re serious about building wealth, reducing taxes, and securing your legacy, a cash balance plan could be the ideal solution. With a thoughtful approach and expert guidance, these plans can provide exceptional retirement security and long-term financial success.

Interested in learning how a cash balance plan could fit into your financial strategy? Reach out NFP Insurance Solutions to explore your options and craft a plan tailored to your unique goals.