Defined Benefit Plans & Cash Balance Plans, which have been around for decades, are gaining steam for a variety of reasons. First, these plans provide the highest contribution limits amongst qualified retirement plans (as much as $220,000 in 2018), which in turn can provide a large tax deduction while accelerating retirement savings.
Both plans have surged in popularity this year because of the tantalizing new 20% deduction (199A) available to certain businesses with pass through income as part of the new Tax Cuts & Jobs Act. The difference between the two plans is fairly simple.
Defined Benefit plans are typically suited for sole proprietors or businesses without employees.
Cash Balance plans are generally good for small business owners with employees that wish to maximize their own contributions and tax advantage of very large tax deductions without giving up too much revenue to employees.
When combined with a 401(k) profit sharing plan an employer can make even more substantial contributions to themselves.
Interestingly, if you’re employed but and have a second source of income, these plans could be right for you by reducing your tax liability and saving for your retirement. Net/net, Defined Benefit and Cash Balance plans allow you to save 2 or 3 times what a SEP or 401(k) allows.
For more information about plans please visit https://www.irs.gov/retirement-plans/defined-benefit-plan.
Create a Defined Benefit or Cash Balance plan calculation in as little as 2 minutes. Check out this easy to use calculator.
