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When Your Retirement Plan Hits a Wall

Marie Marks

Aug 27 2024

3 min read

Business owners and partners in a partnership model that hit the maximum contribution amount available in their company-provided 401(k) or profit-sharing plan should look to cash balance plans when aiming to contribute more to their retirement savings.

Often, this group is unaware of opportunities to further enhance their retirement savings and fund more than their 401(k) or profit-sharing plans allow. Bridging the gap between what you can save and what you really want to save is accomplished by leveraging a cash balance plan.

Cash balance plans allow you to defer a much larger contribution for retirement, while also taking advantage of available tax deductions. Under the 2006 Pension Protection Act (PPA) and cash balance regulations issued in 2010 and 2014, the plans are considered “hybrid” in nature. Essentially, they capture the larger contribution limits of a defined benefit plan along with the portability of a defined contribution plan. This has garnered popularity for cash balance plans, and their flexibility and ease of administration has only increased this recognition.

One of the major considerations for establishing a cash balance plan is the larger contribution amount available. As a starting point, let’s look at some examples below based on the maximum earnings allowed for 2024 ($345,000).

Age	401(k) with Profit Sharing	+	Cash Balance Plan	=	Total Contribution
54	$76,500.00		$233,000.00		$309,501.00
64	$76,500.00		$332,503.00		$409,003.00

In addition to the increased amount of contributions, it is also important to take into consideration the tax savings this strategy can provide. Let’s look at the following impact:

	Age 54	Age 64
1. Marginal Tax Rate:	40%	40%
2. Total Deductible Employer Contribution:	$309,501.00	$409,003.00
3. Tax Benefit (1 x 2):	$123,800.40	$163,601.20
4. After Tax Cost of Contribution (2-3):	$185,700.60	$245,401.80
5. Total Allocations to Owner:	$309,501.00	$409,003.00
6. Net Economic Benefit:	$123,800.40	$163,601.20

Based on the 2024 max 401(k) + profit sharing without the 6% cap and 40% marginal tax rate. Every situation is different and is customized to your specific situation. The wealth management team does not provide tax advice. This is for illustrative purposes only; your situation will vary and be unique to your personal income and levels of contribution considerations. This information is based upon publicly available information and is provided for general information and educational purposes only.

What’s Unique about a Cash Balance Plan?

Several other features make cash balance plans unique. For instance, not every employee has to benefit under a cash balance plan, unlike a 401(k) or profit-sharing plan. Another key feature is that a cash balance plan can be used as a funding vehicle for business succession planning. And unlike most other plans, a cash balance plan can equalize the contribution for partners. This plan offers alternative solutions that can break down the walls that ultimately limit contributions. Thus, it provides a higher level of tax-deferred contributions, while opening larger tax deductions and offering more retirement plan savings.

If you’re interested in learning more about how a cash balance plan may work for you, please contact your wealth management advisor.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

Marie Marks

Marie S. Marks, CFP®, is a senior retirement plan specialist with over 35 years of experience serving clients with their cash balance plans, defined benefit plans and defined contribution plans including 401(k), 401(a), 457 and 403(b). Marie specializes in assisting clients in all industries with corporate retirement plans and business consultations. She establishes and oversees retirement plans, provides benchmarking and RFP services and offers documented due diligence processes for retirement planning.