Cash Balance Plans: Offering a Break to Successful Doctors, Dentists and Small Business Owners in Boulder CO

For successful small business owners, cash balance plans can offer larger contributions than 401(k) limits allow.

Are you a small, highly profitable business owner looking for ways to (a) reduce your current taxes and/or (b) dramatically step up your tax-sheltered retirement savings?  If so, a cash balance plan may be worth looking into for your company.

What Is a Cash Balance Plan?

A cash balance plan is a retirement savings vehicle, crafted with the small business owner in mind. When combined with a safe harbor 401(k) or profit sharing plan, it can allow you to make significant, tax-deductible contributions to your own and select partners’ retirement savings, while controlling the costs of your contributions to employee retirement accounts.

What Are the Potential Benefits?

Here are a few of the possibilities a cash balance plan can offer:

·         It can position you to contribute considerably more toward your tax-sheltered retirement savings than 401(k) limits allow – up to $200,000 or more annually (depending on your age, income, years in business and other IRS limits).

·         Your annual contributions are tax-deductible.

·         You can make varying levels of contributions for you and partners in your firm.

·         You must contribute to your employees’ 401(k) accounts, but the contributions can be modest, typically in the range of 5.0–7.5% employee’s salary.


What Does It Take to Set Up a Cash Balance Plan?

In addition to accompanying it with a 401(k) or profit-sharing plan as required, your cash balance plan usually works best when all of these conditions are met:

·         You are a small business owner, age 40 or older, with 1–10 employees.

·         Your expected income is relatively predictable for at least the next five years.

·         You can contribute up to $200,000 or more annually for the next five years.


How Does It Work?

To establish your cash balance plan, you open one trust investment account for the plan, where investments are pooled for participants. Participants typically include you, and any partners or key employees. As the business owner and plan sponsor, you are the plan’s fiduciary trustee, charged with prudently managing its investments (or selecting and monitoring an investment manager to do so for you).

Each cash balance plan participant has a hypothetical “account” that earns a set interest credit annually, regardless of the plan’s actual investment performance. Contributions are then adjusted annually as needed, to fill any underperformance gap that may occur.

Investment Strategy Counts

If you’re reading between the lines, the structure of your plan means that it is both your fiduciary duty as well as in your best financial interests to be careful about how you invest your cash balance plan’s pooled assets.

You probably have taken or are continuing to take plenty of rewarding risks in your thriving business. Your cash balance plan serves as venue for offsetting those risks with a stable approach to preserving the wealth you’ve worked so hard to accumulate. Typically, we’d suggest something in the range of a three percent performance target, generated by a conservatively managed, low-cost portfolio.

Cash Balance Plans in Action

Case # 1 – A Medical Practice with 1-10 Employees*

Dr. Curtis, age 53, is a successful internal medicine practitioner with four employees. During the next decade, she wants to maximize her own retirement savings while contributing to her staff’s retirement accounts. Here’s how that might look:

CB chart1.JPG

Dr. Curtis’ estimated annual tax savings is approximately $78,500, with 93 percent of her contributions funding her own retirement.

Case #2 – Four Business Partners with No Employees*

Four partners in a successful law firm have varying preferences for funding their retirement accounts during the next five years. A cash balance plan can help the senior partners save at accelerated levels, while junior partners can contribute more modestly. Here’s what that might look like:

CB chart2.JPG

The partners’ combined annual estimated tax savings is approximately $145,000.

Careful Planning: The Usual Key to Success

As you might expect, even if a cash balance plan sounds right for you, there are plenty of caveats to consider, including ensuring that you and your plan remain compliant with IRS tax regulations as well as the Department of Labor’s fiduciary rules. We recommend consulting with professional tax and financial specialists to determine how the details apply to you.

* Case illustrations are reprinted with permission from Dedicated Defined Benefit Services. They assume combined federal and state tax rate of 38%. Cases are based on specific assumptions and used for illustration only.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.