Cash Balance Pension Plans are gaining traction among self-employed professionals seeking to maximize their retirement savings while benefiting from significant tax advantages. These plans blend elements of traditional defined benefit pensions and defined contribution plans, offering a unique solution tailored to the needs of high-earning individuals.
Defined Benefit vs. Defined Contribution: What’s the Difference?
To understand Cash Balance Plans, it helps to know the difference between the two main types of retirement plans. Defined contribution plans—such as 401(k)s or SEP IRAs— allow individuals to contribute a set amount each year, sometimes with an employer match. The ultimate retirement benefit depends on total contributions and investment performance over time. Defined benefit plans, on the other hand, promise a specific retirement benefit, typically based on factors like salary and age. In these plans, the employer is responsible for funding the promised benefit and is generally required to make annual contributions while the plan is active.
Understanding Cash Balance Pension Plans
A Cash Balance Pension Plan is a type of defined benefit plan where each participant's benefits are expressed as a hypothetical account balance. Annually, the employer credits this account with a "pay credit" (a percentage of the participant's salary) and an "interest credit" (either a fixed or variable rate). For instance, an employer might contribute 5% of an employee's annual salary and guarantee an interest credit of 4% annually. This structure provides the predictability of a pension with the flexibility and transparency of a defined contribution plan.
Advantages for Self-Employed Individuals
For self-employed professionals, Cash Balance Plans offer several compelling benefits:
- Substantial Contribution Limits:
Unlike traditional retirement accounts, which have lower contribution caps, Cash Balance Plans allow for significantly higher annual contributions. Depending on age and income, self-employed individuals can contribute upwards of $280,000 in 2025. - Tax Efficiency:
Contributions to a Cash Balance Plan are tax-deductible, reducing taxable income in the contribution year. This feature is particularly advantageous for high earners looking to lower their current tax liabilities while saving for the future.
By leveraging Cash Balance Pension Plans, self-employed professionals can significantly enhance their retirement savings, benefit from substantial tax deductions, and secure a stable financial future. If your self-employed business is looking to expand their retirement savings, don't hesitate to reach out to our team for personalized advice.
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PAST PERFORMANCE IS NOT A GUARANTEE OF CURRENT OR FUTURE RESULTS. Examples of historical information included in this presentation do not, nor are they intended to, constitute a promise of similar future results. Specific client portfolio allocations, risks and returns can and may deviate from these examples depending on accounts and types of investments available through each account. Future market views by WJ Interests, LLC may vary significantly from the historical examples presented herein and no one receiving this summary should assume that WJ Interests, LLC will be able to replicate successful views in the future.
