Most company owners and CPAs just think about 401(k), and Simplified Employee Pension (SEP) plans are deferred retirement plans. But there’s another choice on the table that they should be defined as a retirement benefit or cash balance plan.
The maximum that an individual may contribute to a 401(k) or SEP is 25% of the total income of $55,000; for a few small companies and skilled associations, that is fine. The recent 2017 Tax Cuts and Jobs Act (TCJA) means that many small and medium-sized business owners now pay less in taxes and have more to invest for retirement.
This is where the cash balance plan comes into play, in conjunction with a 401(k) program. It offers more deductions for highly paid workers of $100,000, $150,000, $200,000, and more, with smaller sums for non-highly payed workers.
How the Cash Balance Plan Works:
Remember the defined-benefit old-school contracts our grandfathers had back in the 1950s, working for companies like General Motors? A cash balance program is similar, but it does have a 401(k)-like twist.
Standard pension plans give members a certain retirement payout, such as 50% of their last monthly paycheck paid to them when they are alive. A cash balance fund still offers a guaranteed gain but not as a monthly income stream in an account that seems like the lump sum balance of a 401(k) scheme. The closer to retirement, the more deduction the employer will sock to the employee, without this figure being reportable to the employee as compensation.
Benefits:
The labor force is getting older. Many workers don’t even start worrying about spending for retirement until their late 30s and early 40s. Some don’t have to do something seriously until their mid-to-late 40s or well into their 50s. By then, it might be extremely late to completely fund a 401(k) program in order to obtain the retirement outcome that a highly paid investor needs
Uses of a Cash Balance Plan:
Small and medium-sized businesses are taking important action in the cash balance program. There has been growing interest in the technology industry, retail, and manufacturing firms. The biggest demand comes from skilled service firms. Doctors, attorneys, and accountants are usually well-paid and able to save when the figures are through for them, and the donation is deductible.
Setting Up a Cash Balance Plan:
Every year an actuary will design and approve the cash balance plan’s funding. A third-party administrator (TPA) usually prepares the strategy document and periodically provides all the ministerial services to the program. Investment advice and brokerage fees can also apply.
Conclusion
The TCJA has given more cash to many business owners to invest in such items as retirement plans. If you are looking for a tax-friendly way of putting aside some of the tax dollars, then you can take assistance from TCJA. It could be a good idea to look closely at how a pension plan for the cash balance might work for you in order to live your retired life in peace and comfort.
