Orthotown March 2018 - 46

or the orthodontic practice owner, the retirement marketplace can be a crowded space, with many
options and considerations to navigate. Some of these considerations include annual limits on retirement
contributions, rate of return, tax deductibility and tax-free income. Determining key differences and trade-offs
between retirement planning offerings can pose a particularly daunting challenge.
What if a practice owner could come up with a retirement planning strategy that allowed him or her to boost
annual retirement contributions while slashing taxes? And, at the same time, deliver a predictable rate of return
plus the possibility to structure a tax-free income stream? All of this is possible thanks to the powerful blend of
life insurance and investment products that form a cash balance plan-a type of defined benefit plan.

Cash balance plan vs. traditional pension
A cash balance plan is a type of defined benefit plan,
which guarantees a specified benefit or payout based
on a predetermined formula. In a typical pension fund,
such as a 401(k) plan, the amount of payouts depends
on the return of the funds invested.
With a cash balance plan, the formula for calculating
the plan participant's contribution is known ahead of
time, and the plan guarantees a specific benefit or payout
upon retirement.
According to an article by Kiplinger.com senior editor
Eleanor Laise, "Many older business owners are turning
to these plans to turbocharge their retirement savings.
Cash balance plans have generous contribution limits
that increase with age. People 60 and older can sock away
well over $200,000 annually in pretax contributions. In
401(k)s, total employer and employee contributions for
those 50 and older are limited to $57,500." Kiplinger is
a publisher of business forecasts and personal financial
advice.

How it works
The retirement-building advantages of a cash
balance plan start with potentially larger tax deductions,
thanks to higher allowable contribution limits. A second
advantage is tax-deferred growth of plan contributions.
A triple retirement win can be achieved when the life
insurance component of the plan is structured to produce
a future annual stream of tax-free income from the
policy's cash value.
Unlike a 401(k) plan, which relies on individual
contributions from each employee and can increase or
decrease in value based on performance of investment

MARCH 2018 // orthotown.com

vehicles in the plan, cash balance plan contributions
are funded entirely from the owner(s) of the business.
Performance of investment products within the plan is
not of great concern because there is a predetermined
rate (usually 5-6 percent.)
How does a cash balance plan supercharge retirement
savings? The first way is through the annual contribution amount, which can be far greater than 401(k)
contribution limits. The second way is through the
potentially significant tax savings that can be claimed
by the practice owner(s) when adjusted gross income is
reduced by plan contributions. With this one-two punch,
the practice owner's taxes can decrease substantially
compared with a 401(k) plan.
Unlike other defined benefit plans, a cash balance
plan has more flexibility. If a practice has unexpected
expenses, or there is a decline in business revenue, the
plan owner has the option to put in less money.

Whom is it for?
Cash balance plans work best for practice owners
who want at least $60,000 a year in tax deductions. In
addition, these plans are particularly advantageous for
dentists age 50 or older, because they are likely to have
the means to make larger plan contributions and, as
a result, reap the greatest returns. When it comes to
practice size, smaller is better because fewer employees
means the owner keeps more of the money that goes
into the plan and, of course, the resulting tax savings.
There are certain IRS non-discrimination testing
requirements, which determine which employees must
be included in a cash balance plan. Consult with your
financial professional for more details.

http://www.Kiplinger.com http://www.orthotown.com

Table of Contents for the Digital Edition of Orthotown March 2018