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Securing Your Future: An In-depth Look at Cash Balance Assessment for Firms with 40 People or Less

By: Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®,  AWMA®

As the leader of Century Management, I have spent over three decades helping businesses, executives, and families navigate the intricacies of wealth. Among these challenges is the necessity of assessing cash balance for firms, particularly those with a small, concentrated team of 40 people or less. In this article, I want to share with you an alternative approach to planning for your future, which could provide substantial tax benefits and enhance your company's overall financial health: the Cash Balance Plan.

The Path to Potential Tax Savings: Cash Balance Plans

Many business owners are seeking opportunities for large tax deductions. One such opportunity lies in the setting up of a Cash Balance Plan, combined with your existing 401(k). This could be an attractive option if you meet certain criteria.

Before we dive into the details, it's crucial to understand what a Cash Balance Plan is. It's a type of pension plan that allows companies to set aside funds for their employees. Unlike a traditional pension plan, where the final benefit is determined by factors such as salary history and years of service, a Cash Balance Plan specifies a participant's account as a total dollar amount, making it easier for employees to understand the value of their pension benefit.

Who is the Cash Balance Plan For?

To determine if a Cash Balance Plan is right for your business, consider the following criteria:

  1. Your firm is a small professional entity with high annual cash flow.
  2. The owner(s) are older (preferably at least age 50) than the average age of the employees.
  3. The owner reports over $500,000 in annual earned income or W-2 wages.
  4. The owner has maxed out their 401(k) plan, if existing.
  5. The business is willing to contribute 5-8% of employees' income (a cost that can sometimes be covered entirely by tax savings!).

If these criteria resonate with your business situation, a Cash Balance Plan might be a strategic move for your firm.

The Benefits of a Cash Balance Plan

Adopting a Cash Balance Plan is not just about tax deductions. It comes with a myriad of other benefits:

  • Tax Reduction: The contributions made to a Cash Balance Plan are tax-deductible. This can help significantly lower your taxable income.
  • Enhanced Retirement Funding: Alongside your 401(k), you could potentially add up to $245,000 (for 2022) and $265,000 (for 2023) annually into a Cash Balance Plan, substantially augmenting your retirement nest egg.
  • Asset Protection: Funds placed into federally protected retirement plans, such as a Cash Balance Plan, are typically safe from claims by other individuals.
  • Employee Retention and Recruitment: An enhanced benefits package that includes a Cash Balance Plan can serve as a powerful tool for retaining your current team and attracting top talent.

When is the Deadline?

If you're considering this path, remember there's a deadline for setting up and funding a 2022 Cash Balance Plan. For partnerships and S-Corps, it's September 15, 2023, while C-Corps have until October 15, 2023.

Taking the Next Steps

Navigating the world of wealth management, especially retirement plans and tax-saving strategies, can be complex and overwhelming. However, it's a journey that you don't need to undertake alone.

At Century Management, we're passionate about making a positive impact on people's lives by providing guidance and strategic advice in these critical areas. We are not just wealth managers, but we're also a small business, and we understand small businesses. If you're considering a Cash Balance Plan or any other financial strategy, I encourage you to reach out.

We are more than happy to run a complimentary illustration to assess whether a Cash Balance Plan is right for you and your business. Don't wait; give us a call today!

Century Management ("CM") is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Century Management is also registered as a Portfolio Manager in the Province of Ontario. Past performance is not indicative of future results. This information is not intended to be tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans and advisory fees, are supplied in our Form ADV Part 2A and/or Form CRS, which are available upon request or at www.centman.com. CM-2023-07-17