Pensions, IRAs and 401(k)s are familiar concepts to business owners, yet there is another, lesser-known retirement savings strategy that can result in significant tax savings for certain small business owners. A cash balance plan is a defined benefit plan that, similar to a traditional pension, provides a specific benefit at retirement to eligible employees. It can be designed to work in conjunction with an existing defined contribution plan. Unlike defined contribution plans, however, cash balance plans have generous contribution limits that increase with age. This feature makes cash balance plans attractive to older business owners seeking to turbocharge their retirement savings beyond the annual tax law limitations associated with defined contribution plans.
Use of cash balance plans is on the rise, as more small business owners discover the advantages of adding this plan onto their existing 401(k) plans.