Small business owners wear many hats and are often so focused on making their companies successful that they forget to take care of their retirement and their employees’ retirement as well. Also, when just starting out, owners typically have to take little or no salary and reinvest any profits back into the company to get it up and running. Therefore, there is little, if any, money that can be set aside for retirement.
Subsequently, many small business owners find themselves way behind in preparing for retirement. So, to catch up, they contribute to the most popular retirement vehicle, a 401k plan. This type of plan allows them to put away a maximum of $61,000 annually. This is the total of both employer and employee contributions. That sounds pretty good. But there is another retirement plan available that can really turbocharge your retirement savings. That plan is known as a Cash Balance (CB) plan.
There are a couple of major differences between these plans. First, only the employer can contribute to the CB plan, whereas both employer and employee can contribute to the 401k plan. Second, contributions can be much greater in a CB plan, as much as $310,000+, depending on the age and the salary of the participant. It gets even better: you can also have a 401k plan in place at the same time, allowing you a total annual contribution amount of up to $371,000!
CB plans are not for everybody but they work well for businesses with the following characteristics:
- Consistently profitable
- Plenty of free cash flow
- Small number of employees
- Desire to defer as much taxable income as possible.
CB plans are a great way for small business owners to get on track for retirement. Also, they are a great employee recruiting and retention tool. Keep in mind that these are complex plans so you’ll need to work with experts in the field to set up the plan correctly but it will be well worth the time and effort. Please let me know if you have any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
