A retirement plan with a cash balance is available to many small business owners, including lawyers and physicians in private practice. These schemes offer significant tax deductions and accelerated retirement savings, making them particularly advantageous for those nearing retirement. Cash Balance Plans are a class of IRS-approved pension plans that allow for maximum contributions to be made to the pension plan. Many professionals are unfamiliar with this option, although there are advantages to both retirement planning and tax avoidance.
Cash Balance Pension Plan Benefits for Lawyers and Law Firm Owners:
High Contribution Limits One of the reasons why pension plans with a cash balance can be attractive to small business owners and lawyers in private practice is that it provides high contribution limits. As limits increase with age, those nearing retirement can use a cash balance plan to maximize their savings on time. In 2021, for instance, the IRS allows 65-year-olds to contribute up to $276,000 to their cash balance plan. While maintaining the capacity to contribute $26,000 to a 401(k) plan and $38,500 to their profit-sharing plan, also, for a total of $340,500 in tax savings.
Protection against creditors and lawsuits: Cash balance plans also offer security in that they are protected against lawsuits and against most creditors (us government is not included).
Transferability: in many cash balance plans, retired members or those leaving the business can take a lump sum payment and transfer it to an ira.
Fewer Risk Investments since pension funds are invested in a very prudent manner, there is a low risk that a fund will be underfunded, which is a concern for other types of defined benefit pension funds.
Costs to Employers: although cash balance plans still need to meet some testing requirements for the ministry of labor, the requirements are less stringent than one might think. Only 40% of all eligible employees or 50 employees, whichever is lower, should be included in the plan. Depending on the makeup of your business, a large portion of the contribution could go to the owners. A consultant can help you run an analysis to determine the percentage of total contributions that can go to the owners.
Tax Avoidance:Not only do the high contribution limits mentioned above overload a retirement, but they also allow for a greater degree of tax avoidance for high earners. All contributions are tax-deductible Because cash balance plans are IRS-qualified plans.
Recommendation on Benefits of a Cash Balance Plan
The retirement savings benefits and tax benefits of a cash balance pension plan are worth consideration. You can take advantage of an expedited retirement savings strategy and a higher tax deduction than most options. Not surprisingly, it is a tax savings and retirement planning instrument preferred by lawyers.
We specialize in the implementation of retirement plans for lawyers and a large part of our clientele are lawyers. Feel free to send us an email at info@pensiondeductions.com or schedule a call If you’d like to discuss whether this may be the right option for your business.
