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Leveraging the Power of a Cash Balance Plan

April 11, 2024 by Rob Young

Owners of dental and medical practices share a unique set of circumstances when it comes to saving for retirement. While a practice may generate consistent income, much of this income can be devoured by debt payments on practice loans, building loans, and student loans. This can leave practitioners and practice owners without much left over for retirement savings in the early years of their careers. The bulk of a medical professional’s earnings typically come later in their career when loans have been paid down, practices have grown, and income has increased. Because of this, it becomes essential to supercharge savings in the twilight years of a practitioner’s working life to provide for a secure retirement.

Leveraging the Power of a Cash Balance Plan

If you’re already making maximum contributions to your practice’s 401(k) plan, you might be wondering if there is a way to defer more income for retirement. A cash balance plan is a type of defined benefit retirement plan that allows you to contribute a significant percentage of your income towards additional retirement savings.

There are several reasons why a cash balance plan might work favorably for dental and medical professionals:

  • High Contribution Limits: As practitioners are likely to earn a substantial portion of income later in their careers, the high contribution limits of cash balance plans allow for savings far exceeding the savings that can be achieved by contributing to a 401(k) alone. For those later in their careers, a cash balance plan could allow you to save between $100,000 and $300,000+ above and beyond your 401(k) contributions.
  • Tax Efficiency: Cash balance plans offer significant tax benefits because contributions to the plan are tax-deductible (just like your 401(k)). This provision can greatly reduce your tax bill. For those in the later stages of their career, this means that they could reduce taxable income by hundreds of thousands of dollars each year.
  • Flexibility: Cash balance plans are often implemented toward the end of a practitioner’s career. Upon retirement, you can roll your portion of the cash balance plan to an IRA, giving you more flexibility with the management of the assets.
  • Employee Retention: To make contributions to your cash balance plan, you must also make annual contributions to the plan on behalf of your employees. These contributions are theirs when they leave your practice and can be an additional benefit of employment. In a competitive labor market, the cash balance plan is one more tool to attract and retain great people.
  • Protection from Creditors: In some instances, the funds in your cash balance plan can be shielded from creditors, providing an additional layer of financial security.

Is a Cash Balance Plan Just an Extension of My 401(k)?

No. A cash balance plan is a defined benefit plan more akin to a pension. Contributions to a cash balance plan are made by the employer on behalf of the employee(s). The employer bears the investment risk. The plan's contribution limits increase with age, making it hugely beneficial for professionals like you, whose significant income comes later in their career. To make these large contributions on your own behalf, you are also required to make (smaller) mandatory contributions on behalf of your employees. This is different from a 401(k) where employees defer their own salaries into the company retirement plan. 401(k)s shift the investment risk to the individual participants. Depending on the structure of the 401(k), the employer may or make not make contributions to the employee’s 401(k). In summary, the cash balance plan has more requirements than a 401(k) but allows for the practice owner(s) to save more tax deferred dollars for retirement each year.

Is a Cash Balance Plan Right for Me?

Cash balance plans tend to be most effective in professional services firms (medical, dental, law, accounting) with roughly 25 or fewer employees. Because of the required annual contributions, companies should have a strong, consistent net positive cash flow. With the added cost of administration and contributions on behalf of employees, the cash balance plan is best suited for business owners who are older and looking to accumulate a large benefit in a short number of years.

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