Retirement plans such as 401K’s and Profit Sharing Plans offer the opportunity to save for retirement and reduce taxable income. A 401K allows owners and employees to defer pay and therefore reduce taxable income up to $20,500 for those under age 50 and up to $27,000 for those age 50 and up. Business owners looking for additional tax deferral and retirement savings can add a Profit Sharing contribution up to an additional $40,500 for a combined total of $61,000 for those under age 50 or $67,000 for those over age 50. With the top federal tax bracket in 2022 being 37%, business owners can reduce their 2022 federal tax burden up to $22,570 and $24,790 respectively. State tax is also deductible. These amounts may be sufficient for some owners but for those seeking bigger tax deductions and additional retirement savings there is another option.
Cash Balance Plans significantly increase the amount that can be deferred from taxable income and accelerate savings toward retirement. Most often Cash Balance Plans are offered along with the 401K and Profit Sharing Plan. For example, a 60 year old individual may be able to defer up to an additional $285,000 representing an additional $105,450 in current federal tax savings for those in the top tax bracket. Contributions can be based on a percentage of pay or flat dollar amount. Contributions are tied to age and the older a participant, the higher the maximum amount is.
Cash Balance Plans are defined benefit plans but act more like a defined contribution plan. Unlike a defined benefit plan that promises a future lifetime income stream, the cash balance plan is promising the sum of contributions (preservation of capital) plus an interest crediting rate when the participant reaches retirement age. At retirement age, the participant is able to rollover the monies to their Individual Retirement Account (IRA), or to another employer’s retirement plan if that plan accepts rollovers.
More and more traditional defined benefit plans are being frozen and replaced by cash balance plans. Cash balance plans combine the higher contribution limits of a traditional defined benefit plan with the flexibility and portability of a 401(K) plan. Much like 401K and Profit Sharing Plans, Cash Balance Plans are IRS Qualified Plans protected by the Employee Retirement Income Security Act (ERISA) and enjoy protection from creditors even in the event of bankruptcy.
If you’re interested in exploring your retirement plan options, contact our retirement plan team at RetirementServices@mycgfinancial.com , toll free (877) 807-2079 or by visiting our website to learn how we can help.
Advisory services offered by CG Advisory Services, a Registered Investment Advisor. Securities offered by Geneos Wealth Management. Member FINRA/SIPC. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.