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Cash Balance Plans Pros and Cons: Is This Plan Right For You? - YouTube
Channel: True North Retirement
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If you are a business owner who has
a high income and like 110% of other
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business owners wants to
save more money on taxes,
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then pay attention to this week's video
where I'm going to talk about the pros
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and cons of the cash balance plan,
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what you should consider when looking
at if this plan and powerful tax saving
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strategy,
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powerful retirement savings strategy is
appropriate for you and your business.
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My name is Ashley Micciche,
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I am the CEO of True North Retirement
Advisors where we specialize in retirement
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and exit planning for business. Okay.
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So today I want to focus on and really
help you understand three pros and three
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cons that you need to be aware of so that
you can kind of weigh them and decide
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is this plan right for you?
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Pro number one is that the cash bonus
plan would potentially lower your taxable
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income and your AGI. Okay.
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So let's say that you are a consultant,
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you are a service business and
you are very good at consulting.
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You make $450,000 in
2019 you're 58 years old,
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you are married. Um,
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and you currently have a 401ks
man and a profit sharing plan.
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It's like, hopefully you have these
in place. You're maximizing them.
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So for your age you can put up to,
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when you combine the profit
sharing and 401k plan together,
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you can put as much as $62,000 inside
of the 401k profit sharing plan for 2019
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yeah.
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When you stack a cash
balance plan on top of that,
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you can put into your retirement
accounts $261,000 getting you to a total
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retirement savings that year between
all those accounts of $323,000,
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so 62,000 from the 401k profit
sharing plan, and then another
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$261,000 from the cash balance plan.
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You went from $450,000 of
income lobbed off $323,000
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from that.
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Now you easily qualify
for the QBI deduction.
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The taxable income is
lower, your AGI is lower,
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you're paying less in taxes to uncle Sam,
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and you got a tremendous benefit from
doing that because you also have all this
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money that's inside of your
retirement accounts for you,
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when you transition in to retirement.
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[inaudible]
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Pro#2 of the cash balance
plan. If you are 50 or older,
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you can put in anywhere from $158,000
inside of the cash balance plan all the
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way up to $271,000 for more
inside of the cash balance plan.
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Even if you're young like me,
if you are 35 years old even,
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you can put $75,000 inside
of the cash balance plan.
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Here's the thing that I noticed with
a lot of my business owner clients,
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you get to the end of your
working years. We have five,
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10 years left for retirement.
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You have spent most of your working life
just plowing as much money as possible
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back into your business, reinvesting
in the business, growing the business.
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And so now as a result,
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you have like 90 or 95% of your total
net worth inside of this business and
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maybe not so sure that you're going to
get the value that you need out of this
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business when you want to retire in
order to have the financial security that
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you need.
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The beauty of the cash balance plan
is that it allows you to cram like a
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lifetime's worth of saving
into five or 10 years.
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So you can potentially still build
up $1 million or more inside of your
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retirement account,
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outside of the risk of your business in
those last few working years before you
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get to retirement.
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The other major pro of
the cash bound plan,
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particularly for a
closely held business, um,
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maybe it's a family
business, maybe, um, you,
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you are wanting to do, starting
to do some succession planning.
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So maybe there's a key employee or a
family member who's going take over
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ownership. Well.
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Typically in those circumstances it's
really challenging for the departing owner
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to get out of the business what
they need in terms of values.
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So maybe the business is worth five 10
$15 million but the owner taking over,
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can't afford to pay you that kind
of money and in a lot of cases,
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especially when it's a family member,
you don't really want to put, you know,
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tighten the,
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handcuffs on them either and make
you and make them pay you out.
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That kind of money either.
The cash balance plan,
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it's a really powerful tool to use for
that succession planning because what you
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can do is that the business makes
contributions to the plan and you can
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discriminate in the cash balance plan so
you could set this plan up so that only
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the departing owner is receiving any
of this money. Now in order to do that,
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you have to make some,
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you have to pull some other levers and
make higher contributions on behalf of
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other employees outside
of the cash balance plan.
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But you could potentially set up this
cash balance plan just for the owner or
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the departing owner and the business puts
money into this cash balance plan over
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a number of years. And then when
it's time for you to retire,
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when you want to exit,
you could have, you know,
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a million $2 million in this cash balance
plan that helps to fund your exit.
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So it's a fairly tax efficient way. Um,
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if you're going to transition out of a
business where you're not trying to get
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the most value, um,
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but you do need some more
financial resources in order
to transition and you're
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not going to be able to extract
that by selling the business.
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Let's talk about the cons.
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Con#1 is that a cash balance plan,
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has features of a defined
contribution plan,
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like a 401k plan and features
of a defined benefit plan.
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The pension plan,
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it can be a little bit restrictive
in terms of the rules around it.
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You can't just do whatever
you want in any given year.
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And one of those restrictive rules is
that you have to make annual contributions
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to the cash balance plan.
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So these are ideal for a
business that is less cyclical,
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more stable.
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You want to have a business where you
are expecting it as a cashflow and the
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income to be relatively stable.
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It's not grown over the life
of the cash balance plan,
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which is hopefully five or
10 years or more. Con#2,
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is that because cash balance plans are
a little bit more complex than your
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typical 401k,
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there's some very special calculations
that need to happen every year,
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which means you need
to involve an actuary.
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And so in order to put a cash balance
plan in place and then have the actuary do
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all their work every year,
so you stay in compliance.
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It's going to cost you several thousand
dollars in order to hire the actuary
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year in, year out and have
them do the work for you.
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When you're considering the cost
involved with the cash balance plan,
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try not to be, you know,
penny wise and pound foolish.
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For most business owners who are
utilizing this in a way that they should,
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it is well worth the added expense. Okay.
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And then sort of related to that in terms
of additional cost is that because you
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can use the cash balance
plan to discriminate a little
bit and you don't have to
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include everyone in the cash balance plan.
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Typically the trade-off for that is that
you're going to have to provide higher
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contributions to your rank
and file employees then you
would if you didn't have
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the cash balance in place.
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So don't look at this as a way to just
shell out a bunch of cash for your
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employees where you're not
benefiting as the owner.
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It's the exact opposite and in fact your
employees are benefiting tremendously
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while you benefit as well because they're
getting higher contributions on behalf
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of you as the employer than
they otherwise would have.
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But because you're doing that,
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you as the employer can potentially save
hundreds of thousands of dollars if not
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millions of dollars over, you know, five,
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10 year time period by
utilizing the cash value plan.
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So hopefully that clarifies for you and
it helps you understand a little bit
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more what you want to consider. If
you're thinking about a cashflow,
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if you're like, gosh,
this is really intriguing,
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I would love to reduce my taxes
and save a lot more for retirement.
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I'm close to retirement. I got to figure
something else out. Schedule a call.
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You can click on the links below. You
schedule a call with me, uh, 15 minutes.
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I can answer your questions.
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I can ask you a few questions to help
you determine if a cash balance plan is
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right for you. In addition, if
you haven't already done so,
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please like comment and
subscribe to this channel.
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We've put out videos every single week,
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all around the topic of
retirement and exit planning,
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specifically for business owners that
are nearing the end of the working year.
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Thank you so much for watching.
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My name is Ashley Micciche
and I will see you next week.
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