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The Benefits Of Cash Balance Plans

The Benefits Of Cash Balance Plans

| January 15, 2021

If you own a small business or practice, chances are you may be considering a cash balance plan for your team’s retirement. Cash balance plans are a type of tax-qualified, defined benefit pension plan, and they’re a great option for physician groups, dental groups, small business owners, professional firms, and other self-employed individuals.

Considered to be an amalgamation between traditional pension plans and a 401(k) retirement plan, a cash balance plan can be offered by an employer instead of, or in conjunction with, a 401(k). Typically, with this type of retirement plan, employers invest a small percentage of their employees’ compensation, at least 7.5%, toward retirement. 

While there are many things to consider when choosing the best retirement plan for your business, we at Nichols Financial Strategies have outlined some of the most common benefits to consider when you are thinking about a cash balance plan.

Tax Benefits Now And Benefits Later 

One of the biggest benefits of a cash balance plan is that it can reduce your current and future tax bills. This is because contributions to the plan are tax-deductible, maximum contributions are much higher compared to other retirement plans, and the investment return is tax-deferred. Below is a graph showing the income-tax savings of a 50-year-old individual with an income of $285,000. As the graph indicates, a 401(k) and profit-sharing plan yields significantly less income-tax savings than a 401(k) and cash balance plan. 

Additionally, these plans can be designed with cash value life insurance, which can provide you with a tax-free benefit and tax-free retirement income. Below is a sample cash balance plan that maps out the tax savings and the life insurance death benefit for survivors.

As you can see, this cash balance plan allowed for a total tax savings of $243,257 and a total life insurance death benefit of $3,357,592. Another important detail is that the cash balance plan can be set up under the Employee Retirement Income Security Act (ERISA), meaning that the retirement plan will be protected from creditors going after the funds. 

Increased And Accelerated Retirement Savings

Compared with a 401(k) and profit-sharing plan, a cash balance plan allows for larger annual tax-deductible contributions and benefits. For your higher earners, like physicians in a medical group or business owners, allowing for larger annual contributions can be a preferred option because it allows them to pay less in income tax.  

The graph below shows a sample maximum annual contribution for both a 401(k) profit-sharing plan only, compared with a 401(k) and cash balance plan. As you can see, the 401(k) profit-sharing plan only allows for a maximum contribution of $58,000, depending on the employee’s age; whereas the 401(k) accompanied by the cash balance plan allows for maximum contributions in a much greater amount, especially as contributors to the plan age and get closer to retirement.  While this article clearly demonstrates different advantages of cash balance plans, one thing we like to highlight with our clients is how beneficial it is for business owners. With this type of retirement plan, business owners typically receive 80% to 95% of all retirement contributions.

We’re Here To Help

Are you wondering whether a cash balance plan would work for your business? We at Nichols Financial Strategies can help you answer that question. Reach out to us at 559-440-6999 or by email at

About Matt

Matthew Nichols is founder, CEO, and wealth advisor at Nichols Financial Strategies with more than 20 years of experience in the financial industry. He spends his days serving business owners and families, specializing in helping those in the agriculture industry proactively prepare for the unique challenges they face in a rapidly changing economy. Matt is an Accredited Investment Fiduciary® (AIF®) and holds his FINRA Series 7 and 63 securities registrations with LPL Financial and his California State Life & Health Insurance license. He’s also pursuing his ChFC designation and is dedicated to continuing his education and staying abreast of the latest financial trends and strategies. Matt’s mission is to help his clients transfer wealth from one generation to the next and work toward achieving their goals so they can spend more time on what they love most. Matt was born and raised in the California Central Valley and resides in Fresno with his wife, Christy, and their two daughters, Holly and Jillian. He enjoys golf, traveling, skiing, and spending quality time with his family. To learn more about Matt, connect with him on LinkedIn.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.