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Peter Thoms CFA

Own A Small Business? This May Be Your Best Tax Move For 2020

If you own a successful small business or professional practice, it is not (yet) too late to make a last-minute move to save big on your 2020 tax bill . . . but time is running out.

For many business owners, the single biggest drain on their income is often taxes, and potentially the best way to help plug this drain is to make large, annual, tax-deductible contributions to an IRS-approved qualified retirement plan called a cash balance plan.

Cash balance plans are so powerful for those who qualify for them because they help plan owners to accomplish two important financial goals simultaneously:

  • Significantly reducing their tax bill
  • Rapidly building a large retirement nest egg

Cash Balance Plans Offer Powerful Advantages

Many small business owners start off by contributing to 401(k) plans or SEP-IRAs, but the IRS contribution limits for these plans are quite low—much lower than for cash balance plans.  Hence, cash balance plans are a much more powerful tax strategy.

More and more, successful small business owners are opening cash balance plans to significantly cut their tax bills while accelerating their retirement savings.  Some high-income business owners are able to make very large contributions that can enable them to slash their current year tax bill by $40,000, $60,000 or even $100,000, depending on their circumstances.

Cash balance plans are often paired with Safe Harbor 401(k)/profit sharing plans to provide the highest possible tax savings for the business owner.

Unlike 401(k) plans or SEP-IRAs, each cash balance plan is custom-designed to meet the specific tax reduction and retirement savings needs of the business owner.  The allowable plan contribution is calculated based on several factors, including age, compensation, and years of employment.

Here are several reasons that cash balance plans are increasingly popular with small business owners and professional practices:

  • Large annual tax deductions for business owners
  • Much higher contribution limits than other retirement plans
  • Flexible structure to meet specific needs of business owners; for example, business partners can have different contribution levels
  • Plans allow employers to offer retirement benefits to their employees while retaining a high degree of control over their contributions
  • Investments grow tax-deferred, building wealth more rapidly
  • Assets are protected in case of lawsuit or bankruptcy
  • At retirement (or plan termination) assets can be rolled into an IRA to continue tax-deferred growth

Case Study

Consider the following example, a small dental practice with an owner and four full-time employees:

Andrew is a dentist and earns $325K per year.  He wants to cut his tax bill while building up his retirement fund.  

He establishes a cash balance plan and Safe Harbor 401K/profit sharing plan.  

Each year, he contributes $175K for himself and $10K for his employees.  Given his 30% tax rate, he will now cut his tax bill by $52,500 per year while rapidly growing his retirement account.  

Now, instead of writing big checks to the IRS for his quarterly estimated taxes, he is writing them to his own retirement account.

For more examples of how people are using cash balance plans, visit:

Will A Cash Balance Plan Work For You?

So, how do you know if a cash balance plan is right for your business?  Just ask us.  Call us at 619.435.1701 or email us:

You can also fill our out short online survey. With just a few pieces of informaton about your business, we will generate a complimentary tax-savings proposal for you.  There is no cost to you for this service and no obligation whatsoever.

If you find that a cash balance plan works for your situation, you will have to move quickly if you want to save on your 2020 tax bill.  Plans must be established by December 31 of the year for which contributions are made.  However, it takes time to devise the plan and create the plan documents, and pension administrators are typically very busy in the last couple of months of the year.  Thus, it is best to begin the process of establishing your plan right now.

A cash balance plan is not right for everyone, but for those in the right circumstances it can be a very powerful tool for both reducing taxes and building wealth.

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Peter Thoms, CFA , MBA

Peter Thoms, CFA , MBA

Peter Thoms founded Orion Capital Management LLC in April 2002. Peter has an extensive background in crafting investment solutions for high-income clients in a wide variety of circumstances.

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