As a business owner, you're always looking for ways to improve your bottom line and maximize profits. One way to do this is to create a cash balance plan.
A cash balance plan is a type of retirement account that allows business owners to set aside money for themselves and their employees on a tax-deferred basis. If you're thinking about starting a cash balance plan for your business, there are a few things you need to know.
In this article, we'll discuss all aspects of cash balance plans.
What is a Cash Balance Plan?
Cash balance plans are similar to traditional pension plans in that they are designed to provide a stream of income at retirement. However, there are some key differences between the two types of plans.
With a traditional pension plan, benefits are based on years of service and salary history. With a cash balance plan, benefits are based on account balances. This means that each year, the account balance grows by a certain percentage, and this growth is credited to the account holder.
Cash balance plans are often referred to as "defined benefit" plans because the benefits are known in advance. This is in contrast to plans like 401(k)s, where the benefits depend on how much money is contributed and how well the investments perform.
How Does a Cash Balance Plan Work?
There are two main parts to a cash balance plan: the employer contributions and the investment earnings.
The first part is the employer contributions. Business owners can choose to make contributions on a tax-deductible basis. The money that is contributed grows tax-deferred until it is withdrawn at retirement.
The second part is the investment earnings. The money in the account is invested, and the earnings on the investment are credited to the account balance. The account balance grows over time, and this growth is compounded (i.e., it earns interest on itself).
Financial and Tax Benefits
The earnings on the investments in a cash balance plan grow tax-deferred. This means that the money can grow without being taxed each year. The account holder only pays taxes on the money when it is withdrawn at retirement.
Another benefit of cash balance plans is that they offer flexibility. Business owners can choose how much money they want to contribute each year. They can also choose how the money is invested.
A cash balance plan can provide a certain degree of financial security. This is because the account holder can choose to have the money invested in a way that provides some level of protection against market fluctuations.
Potential Downsides
They can be complex. This is because there are two parts to the plan (the employer contributions and the investment earnings). This can make it difficult to understand how the plan works and how the benefits are calculated.
Business owners may have to pay fees to set up and maintain a cash balance plan. These fees can include administrative fees, investment management fees, and legal fees.
It must satisfy all IRS rules and regulations. This can be a complex and time-consuming process.
Where Cash Balance Plans Work Especially Well
Despite their inherent risks, cash balance plans may allow business owners, partnerships, and key employees to significantly boost their retirement savings while costing the company little. A stable or increasing income stream is required for a business to consider a cash balance plan. These plans are less effective for firms that have significant revenue cycles.
Find The Best Plan For Your Business
If you are a business owner, you may be able to benefit from a cash balance plan. DPH Financial Services can help you find the best plan for your business. We will work with you to understand your goals and objectives. We will then create a customized plan that meets your needs. Contact us today to learn more about how we can help you.