How Small Business Owners Can Turbo Charge Their Retirement Plan

Small business owners who are contemplating saving for retirement have a wide array of options available to them, and not all are created equal. Each business has its own set of unique circumstances that need customized solutions that are tailored to support their unique situation.

As a small business owner, a common goal is to create, grow and sell your business to achieve financial independence. In addition to the managing of the day-to-day operations, you are not only responsible for making retirement-planning decisions for yourself, but also for your employees.

Additionally, another common trait I see in working with small business owners is that many were not able to save much early on because most if not all of their income was invested into growing their business. As a result, many small business owners feel that they are playing ‘catch up’ with their retirement savings needs.

Because of this, a traditional 401k plan may not provide enough tax-deferred savings for the business owner. There is however, a possible solution to this dilemma through a Cash Balance Plan, which has gained popularity over the last few years. A Cash Balance Plan could allow business owners to put away four to five times the amount allowed in traditional retirement plans, and can help an owner ‘catch up’ and reach their retirement goals.

What is it?

A Cash Balance Plan is a hybrid of a defined-benefit pension plan and a defined-contribution plan such as a 401k. Because Cash Balance Plans are typically a defined benefit plan, the usual limits of $55,000 do not apply. For the right situation, business owners can put away six-figure amounts of tax-deferred dollars. An employer can even use a 401k and a Cash Balance Plan together to truly maximize the amount of dollars they can save in a tax-deferred account.

Cash Balance Plans can also reduce current income tax liability. One caveat is that the employer must pay into his/her plan each year, so the cash flow/revenue of the firm must be steady to sustain the yearly commitment. For many closely-held business owners, adding or creating a Cash Balance Plan feature can offer a tremendous opportunity to dramatically increase their retirement savings later in their career and lower their current income tax liability.

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