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Cash Balance Plan
 A Cash Balance plan can be a powerful tax savings tool for businesses and self-employed individuals.

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Cash Balance Plan

A Cash Balance Plan is a type of defined benefit retirement plan that can be a powerful tax savings tool for businesses and self-employed individuals. It allows for larger tax-deductible contributions compared to other types of retirement plans, such as a 401(k) or a Simplified Employee Pension (SEP) plan.

The term "cash balance plan" refers to the nature of the plan. Each participant has an account that starts with an initial balance, which grows annually with contribution credits (a percentage of annual compensation determined by the plan's terms) and interest credits (either a fixed or variable rate also specified by the plan's terms).

Here's how it can be beneficial from a tax strategy perspective:
  • Tax-Deductible Contributions: Contributions made by the employer to the cash balance plan are tax-deductible, reducing taxable income for the business.

  • Tax-Deferred Growth: The investments inside the cash balance plan grow tax-deferred, which means the money isn't taxed until it is distributed.
  • Large Contribution Limits: Cash balance plans can have much larger contribution limits than other retirement plans, with maximum limits determined by a participant's age and income. Larger contributions make cash balance plans an excellent tool for high earners who want to save significantly for retirement and lower their current taxable income.
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  • ​​​​​​​Ability to Combine with Other Retirement Plans: A cash balance plan can be combined with other retirement plans, like a 401(k), to increase tax deductions further. This strategy, known as a "stacking strategy," can provide considerable tax benefits.
  • Beneficial for Business Owners and High-Income Professionals: These plans are especially useful for business owners and high-income professionals, such as doctors or lawyers, who can afford to make large contributions and want to reduce their taxable income significantly.
Please note that any tax strategy related to a cash balance plan should be discussed with a financial advisor or tax professional, as the rules are complex and can change based on IRS regulations and your specific circumstances.
* All strategies on this site are intended for informational purposes. It is highly recommended that all combinations of this strategy are implemented by a licensed and experienced professional.