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Cash Balance Plans

Tax Deferred Savings

Cash Balance Plan

A Cash Balance Plan is a defined benefit plan that can be bolted onto your Self-Directed Solo 401(K) and further reduce your taxable income.  It can also be established on a stand-alone basis in lieu of a Self-Directed Solo 401(K) plan.  If you love the potential tax savings and vast investment options that a Self-Directed Solo 401(K) offers but would like to do more, this could be a great solution!

Maximized Reduction of Your Taxable Income

As this chart below illustrates, the maximum tax-deductible contribution amounts made to either plan on its own or on a combined basis is substantial and can result in significant tax savings:

Cash Balance Plan

There are a few key differences between a Self-Directed Solo 401(K) and a Cash Balance Plan, particularly from a solo owner perspective. 

A Self-Directed Solo 401(K) enables you to choose between Traditional (pre-tax), Roth (after-tax) or After-Tax contributions or any combination thereof, whereas a Cash Balance Plan is just Traditional (pre-tax).  Therefore, the objective of a Cash Balance Plan is on tax savings through deferral in the current year only.  You will need to assess how this might impact your long-term tax strategy. 

In addition, the Cash Balance Plan is most effective when your investment performance is more conservative or modest, as the goal is not to seek extraordinary returns but rather typically target 4-6%.  With a Self-Directed Solo 401(K), you hope that you can maximize investment returns every year and there are no limits or restrictions on how fast you might choose to grow the account. 


An Actuary is Required

A Cash Balance Plan requires the use of an actuary who will issue a report that provides the range of contribution amounts that can be made each year.  The actuary will consider several factors, one of which is investment performance.  If it is stronger than baseline it might adversely impact your ability to maximize future contributions.  

A Cash Balance Plan allows you to self-direct as well, but if you technically do too good of a job and achieve stellar returns it might be counterproductive and defeat the main objective of tax savings through deferral.


The initial and ongoing cost of implementing and maintaining a Cash Balance Plan is greater than a Self-Directed Solo 401(K) due to the technical requirements and use of an actuary, but the tax benefits recognized should far outweigh. 

When you use one or more retirement plans as part of your tax strategy what are you really doing?

 To give a simple analogy, you are taking money from your one pocket and putting it into your other.  This basic shift can make a world of difference on your tax situation and hopefully help you build substantial wealth by empowering you to invest the way you want to.

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