A cash balance or direct benefit plan is a type of retirement plan that belongs to the same general class of plans known as “Qualified Plans.” Another example of a qualified plan is a 401(k). These plans qualify for tax deferral and creditor protection under ERISA. 

Many successful owners and partners are looking for larger tax deductions and accelerated retirement savings. Cash Balance and Direct Benefit plans have the largest contributable levels that are dollar-for-dollar pretax deductions. The increased contribution levels can allow you to double, triple, or quadruple your tax-deferred savings power. 

These plans represent the fastest-growing sector of the retirement plan market for a very good reason.

 

You can use these in combination with other employer sponsored plans. 

Not only do these plans represent the highest contributable levels in the qualified plan market, an employer can offer a combination of qualified retirement plans in order to produce a larger contribution amount. Just as a Profit-Sharing feature can be added to a 401(k) plan, an employer can add a Cash Balance Plan or Direct Benefit Plan as well. 

Tax-deductions are hard to come by, especially those that reduce ordinary income dollar for dollar pre-tax. With combined federal and state income taxes reaching as high as 45%, the tax savings from the contributions and subsequent earnings on these contributions can be very significant.

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Example:

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One single contribution of $130,000 earning 5% a year for 30 years would be worth $561,852 at the end of that term. However, if the $130,000 had been taxed in the year contributed so that an “after tax” amount was invested with subsequent earnings also being taxed each year (assuming the highest tax rate indicated above), then the total value would only be $162,937 at the end of the 30-year term. This is only 29% of the value that the tax deferral advantage a cash balance and direct benefit plan give you. 

 

Are you a good candidate? 

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Many owners, partners, and professionals find cash balance and direct benefit plans to be an excellent way to amplify their retirement account contributions and over all plan. We have found that those who fit the following criteria are generally the best candidates for these plans.

 

• Partners, owners, or other professionals who desire to contribute more than $50,000 a year to their retirement accounts

  • Many professionals and entrepreneurs neglect their personal retirement savings while they’re building their practice or their company. They often have a need to catch up on years of retirement savings in a shorter amount of time. 

• Companies that are already contributing 3-4% to employees, or at least willing to do so.

  • While these plans are often established for the benefit of a few key executives and other highly compensated employees, other employees benefit as well. The plan normally provides a minimum plan contribution between 5% and 7.5% to pay for the staff in the Cash balance, direct benefit, or a separate profit sharing or 401(k) plan. 

• Companies that have demonstrated consistent profit patterns

  • Because these plans carry with them defined and required annual contributions, consistent cash flow and profit is very important.

• Owners, Partners, or executives who are 40 years of age or over who desire to ‘’catch up’’ or accelerate their pension savings

  • Maximum contributions allowed in these types of qualified plans are age dependent. The older the participant, the faster they can accelerate their savings.