Cash Balance plans are an increasingly popular retirement plan option, but many business owners are still wondering if they are the right fit for their retirement needs. While Cash Balance plans offer a variety of solutions and fit many needs, there are two primary problems that they can solve for business owners. Let's examine those two problems and how Cash Balance plans provide solutions.
Whether Sole Proprietors, Partnerships, or S-Corps, all have to take the company earnings and claim taxes on those earnings for the year in which that money was earned. In Indiana, a successful company will pay 43% income taxes on these earnings if the earnings are taken as income. Therefore, it is not unusual for a company to have one million dollars in earnings, and have to pay $430,000 in taxes. That hard-earned money is gone forever. Have you experienced a similar plight? The good news is, a Cash Balance plan can help.
Instead, business owners can take that same $430,000 (or something less), and put $350,000 in their retirement account, and give their employees $80,000. This way, the owner keeps the majority of the money, uses a small portion to incentivize employees to stay with the company through a vesting schedule, and promotes happy employees, which leads to higher employee retention. The owner must spend that $430,000 either way. One way, he gives it to the government and loses it forever. In the other scenario, he gives some to his employees and a large chunk to his future self.
The second issue that successful business owners often face is improper planning for their retirement. Sometimes, it is as simple as the busyness of building a business that can cause an owner to forget to save for retirement. Other times, the owner is counting on selling their business to create their retirement fund, but they over-estimate what their business will be worth. The Cash Balance plan allows an older, successful business owner to make up for lost years of retirement by putting in large contributions over a short period of time. It may also allow him to pass a business on to family rather than having to sell it. The Cash Balance plan also promotes a promised retirement benefit at retirement age. An owner will know exactly what he is getting financially, unlike a 401(k) that can fluctuate in value. Lastly, a retirement benefit is free from creditors (even the IRS), so if you are in a business that could easily get sued, such as a medical practice, the Cash Balance plan guarantees your money.
If these solutions sound like just what you need to get your retirement planning on track, please let us know. We are happy to talk to you further about Cash Balance plans and how to implement one for your business.
