Here is some high-end retirement planning advice -- for people who are going to pay through the nose when the government gets done with tax reform.
Cash-balance retirement plans aren't for everyone, but if you own a small business or are a self-employed, high-earning professional, a cash-balance plan will let you put aside the most tax-advantaged money for your retirement -- twice or three times as much as a solo 401(k) or a Keogh.
This is not do-it-yourself retirement planning. Cash-balance plans are complicated and expensive to set up and maintain. You really need expert help. Even the accountant who handles your routine tax filings may not be able to adequately puzzle through one of these.
If you need help making up your mind about whether one of these plans might be good for you, check out "Beyond the 401(k): How Financial Advisors Can Grow Their Businesses with Cash Balance Plans" by Daniel Kravitz, Ken Guidroz and Steven Sansone, all principals at Kravitz Inc., a retirement-planning consultancy.
A cash-balance plan is a hybrid of a traditional pension plan and a defined contribution plan like a 401(k). The account grows annually in two ways: first, a contribution, and second, an interest credit, which is guaranteed rather than being dependent on the plan's investment performance.
The older the participant in a cash-balance plan, the greater the amount he can contribute annually, up to the current lifetime limit, which is about $2.5 million as set by the IRS. The annual contribution must be calculated by an actuary and is determined by a formula specified in the plan document. It can be either a percentage of pay or a flat dollar amount.
The result is that a high-earning individual, member of a small partnership, or a husband-and-wife team can create a cash-balance plan that lets them reach a predetermined retirement savings goal in a relatively few years, sheltering everything they save and earn in the plan from current taxes. The concept isn't new, but it hasn't been really clear how the IRS viewed these plans until the last year or two.
Kravitz says cash-balance plans are especially good for family businesses because they not only ensure that the senior members can save significant amounts for retirement, but they also can factor into succession planning, allowing the family company to better manage the transfer of assets from one generation to the other in a tax-friendly way.
How much do you have to earn to make a cash-balance plan make sense? Kravitz says $250,000 annually is probably the minimum -- either as a partner or a solo practitioner, or possibly, as a husband-and-wife team in the same or related businesses.