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BUSINESS
TAX SAVINGS:
401(k) Nice, Cash Balance Better
By Eric Kala CFP®, CIMA®, AEP®, CLU®, ChFC®
Wealth Management Advisor | Estate & Business Planning Advisor
Avid Wealth Partners Affiliated with Northwestern Mutual
Most practitioners today in private practice have established a to rollover your distribution to an IRA so that it continues to remain
401(k) plan. This plan has a dual purpose. First, the 401(k) plan pro- in a tax deferred vehicle is also available. These are the same fea-
vides the practice and its employees with a qualified retirement plan. tures that make your 401(k) plan so attractive, but now we are able
Second, the business owner receives a tax deduction. The 401(k) to do this on a much larger scale.
plan has its limits though. The most that can be put away for retire-
ment in a year is $54,000 in 2017 ($60,000 if you are age 50 or Think of your 401(k) plan as your employee benefit plan. Now
older). What if we could take the attributes of your current 401(k) think of the cash balance plan being added on as your plan. Typi-
plan and significantly scale it up? cally your 401(k) plan is designed today to take advantage of the
IRS’s rules on non-discrimination. This allows you to get a relatively
How could we do that? By adding a cash balance plan to your re- high percent of the overall contribution for yourself. When we add
tirement and tax planning arsenal. A cash balance plan is another the cash balance plan on top of your 401(k) plan we get a result that
type of retirement plan that is fully qualified by the Internal Revenue adds even more leverage to your overall retirement program.
Service (IRS). It allows an owner that makes more than $265k an-
nually to accumulate in excess of $2.5 million dollars over a ten- Here is an example. A physician who is 64 years old making
year period. With the addition of a cash balance plan your $265k per year with a staff of three employees whose payroll is
deductible contribution increases from $54,000 to as much as $135,000. Currently he has a 401(k) plan where he is contributing
$250,000 or more. $59,000 for himself and $6,200 for his staff. By adding a cash bal-
ance plan his contribution increases to $269,000. As a result of the
A cash balance plan is a pension plan that looks and acts very addition of the cash balance plan his staff cost has only increased
much like your 401(k) plan. It has an account balance that grows to $22,000. Over 92 percent of the contribution is going to the
each year by the addition of an employer contribution and an in- owner and the tax savings jumped from $26,000 to $116,000 (based
terest credit. That account balance is also the benefit that you will on a 40 percent tax rate), with an estimated decrease of $90,000 on
receive from the plan. The contributions funding the plan are tax his tax bill.
deductible. The growth in the plan is tax deferred and the option
The previous example was for a small company. The cash balance
32 San Antonio Medicine • November 2017
