“The best investment you can make is an investment in yourself” is a common saying and entrepreneurs seem to really take it to heart. They see more growth potential in their own businesses than in the stock market or other traditional investments. Because of this, throughout most of their working years, they pour all of their money back into their business instead of saving for the future.
When their hair starts graying and they realize the clock is ticking, they come to a financial advisor like yourself looking for help. What can you do with a 15-year time horizon and barely any current retirement savings? For business owners, the answer is often sponsoring a cash balance pension plan.
Increased Saving Potential
Cash balance pension plans have much higher contribution limits than other, more common, retirement plans like 401(k)s. Contribution limits are based on age and the maximum allowed payout. For example, in 2020 you can contribute up to $75,000 for a 35-year-old. That is impressive considering the limit for a 401(k) with profit sharing is only $57,000. The limit more than doubles for a 50-year-old to $158,000, and a 70-year-old can put away up to $336,000 this year. (1)
While older business owners who are behind on saving for retirement reap the most benefit from sponsoring a cash balance plan, they are also very helpful for successful young entrepreneurs looking to get ahead in their retirement savings. By setting aside such large amounts for retirement while younger, business owners buy themselves the flexibility to retire early or work on less lucrative but more meaningful projects.
Lower Taxable Income
The ability to set more money aside for retirement lowers a business’s taxable income, which is the second great benefit of sponsoring a cash balance retirement plan. A lower income means that your client will pay lower taxes, which is good for your clients’ businesses and their satisfaction with your services.
Decreasing tax liabilities is always beneficial, but with the new qualified business income deduction, it may be even more important. If you have a client with a service business that is close to the qualified business income deduction phaseout, sponsoring a cash balance plan could make the difference in their eligibility for the deduction.
Independent Of Employee Participation
One of the most frustrating things about 401(k)s for high earners is that their ability to save for retirement is dependent on the savings rates of lower-level employees. Because of nondiscrimination rules, if rank-and-file employees do not voluntarily put enough aside for retirement, then the amount that higher earners and business owners can save is decreased.
With a cash balance retirement plan, contribution limits are independent of other workers’ behavior. Contributions are only made by the sponsoring company, so they have full control over the usage of the plan. A business owner’s ability to save for retirement will not be hampered by any apathy on the part of others.
How I Can Help
As you can see, a cash balance pension plan is a powerful tool for any business owner but especially older ones who need to save more for retirement. If you have clients that you feel could benefit from sponsoring a cash balance plan through their company, email me today at firstname.lastname@example.org. As a pension specialist, I can work with both you and your client to set up and administer a retirement plan that will allow them to better prepare for the future that they dream of.
About Kenny Phan
Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.