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Maximize Tax Savings and Retirement: 401(k) & Cash Balance Plans for High-Income Real Estate Professionals, Healthcare Professionals and Entrepreneurs

 

The Power of Combining 401(k) and Cash Balance Plans

As a successful real estate professional or self-employed entrepreneur, you're likely always on the lookout for ways to reduce your tax burden while securing your financial future. If you haven't considered combining a 401(k) with a Cash Balance plan, you might be missing out on a powerful strategy to achieve both goals. Many individuals have set up SEP IRA’s or Solo (k) plans, but don’t realize that they could be maximizing even more than these plans allow. Let's explore how these retirement plans can work together to provide significant tax savings and boost your retirement nest egg.

Scenario 1: High-Income Real Estate Broker

  • Sarah, age 52, earns $400,000 annually

  • Without retirement plans, her federal tax bill is approximately $114,000 (assuming standard deduction)

With a combined 401(k) and Cash Balance plan:

  • 401(k) contribution: $73,500 (including catch-up)

  • Cash Balance contribution: $200,000

  • Total retirement contribution: $273,500

  • New taxable income: $126,500

  • Estimated federal tax: $22,000

Tax savings: $92,000

Scenario 2: Successful Entrepreneur

  • Mark, age 45, has a net income of $800,000 from his business

  • Without retirement plans, his federal tax bill is approximately $259,000

With a combined 401(k) and Cash Balance plan:

  • 401(k) contribution: $66,000

  • Cash Balance contribution: $300,000

  • Total retirement contribution: $366,000

  • New taxable income: $434,000

  • Estimated federal tax: $121,000

Tax savings: $138,000

 

Contribution Limits for 2025

Plan can be designed with flexibility on your contribution amounts to tailor to your business. The maximum contribution limits for 2025 are outlined below by age range. Tax Savings are based upon 45% income tax rate.

Additional Benefits

  1. Catch-up on Retirement Savings: If you've focused on growing your business and neglected retirement savings, this combination allows you to make significant contributions quickly.

  2. Asset Protection: Retirement accounts generally offer strong protection from creditors, which can be crucial for business owners.

  3. Flexible Contributions: Cash Balance plans can be designed with some flexibility, allowing you to adjust contributions based on business performance.

Important Considerations

  • Cash Balance plans require annual actuarial calculations and have less flexibility than 401(k)s.

  • There are costs associated with setting up and maintaining these plans.

  • You'll need to commit to funding the plan for several years.

  • Consult with a financial advisor and tax professional to ensure this strategy aligns with your overall financial goals.

Combining a 401(k) with a Cash Balance plan can offer a powerful way to reduce current tax liabilities while rapidly building retirement savings. The potential for six-figure tax deductions makes this an attractive option for those in higher tax brackets. However, it's crucial to carefully consider your long-term financial goals and consult with professionals to design a plan that works best for your unique situation.

By taking advantage of these retirement savings vehicles, you can keep more of your hard-earned money working for you instead of going to taxes, all while securing a more comfortable retirement future. Please reach out if you’d like to discuss your situation in more detail.

Scott Busch