Part 2 of our Year-End Planning Series looks at Cash Balance plans, a powerful but coordinated retirement strategy for business owners whose 401(k) or SEP contributions no longer move the needle on their tax liability.
In Part 1 of this series, we looked at Donor-Advised Funds as a way to coordinate charitable giving with year-end tax planning. This installment turns to a different lever entirely: retirement plan design for business owners whose tax liability has outgrown their current plan.
When a 401(k)/Profit Sharing or SEP Isn't Enough
If you're a business owner with a 401(k)/Profit Sharing plan or a SEP already maxed out, and your annual tax liability is sitting in the mid to high six figures, you've likely already captured the easy wins. The question becomes: what else is available?
For many owners in this position, a Cash Balance plan is worth exploring. It's a type of defined benefit plan, but it's structured and communicated more like a defined contribution plan, which makes it a natural complement to a 401(k)/Profit Sharing plan rather than a replacement for one.
Why the Timing Matters Right Now
One of the more useful features of a Cash Balance plan is the flexibility in timing. Generally speaking, a plan can be adopted and funded after year-end, as long as it's established (including extensions) for the current year. That means decisions and plan design work can continue into the new year, while the contribution and the associated deduction apply to this tax year.
This is different from the mindset many owners have around retirement planning, where the assumption is that the window closes on December 31. With a Cash Balance plan, there's often still runway even after the calendar flips, provided the design work starts now.
Why These Plans Require a Coordinated Approach
Cash Balance plans are powerful, but they're not a do-it-yourself exercise. The contribution amounts are based on actuarial calculations tied to factors like age, compensation history, and years to retirement, and the plan design has to account for the business's full employee census, ownership structure, and cash flow.
Get the design wrong, and you risk a plan that's either underfunded relative to what you could have contributed, or structured in a way that creates unintended costs or complications down the road.
This is why we typically approach Cash Balance plan design in coordination with your CPA. Your CPA understands the business's tax position and compliance requirements, and we focus on how the plan fits into your broader investment, retirement, and tax strategy. Done well, this is a team effort, not a solo decision by any one advisor.
Is a Cash Balance Plan Worth Exploring for You?
If your tax liability has reached a level where your current retirement plan isn't moving the needle the way it used to, it may be time for a conversation. The earlier that conversation starts, the more design options remain on the table before this year closes out.
This content is for educational purposes only and does not constitute tax, legal, or investment advice. Please consult your tax or legal professional regarding your specific situation.