Orthotown November 2017 - 41

Let's examine one real-world example in which a
48-year-old practice owner has $243,000 in annual
income. He is contributing $18,000 a year to the
practice's 401(k) plan. By setting up a cash balance
plan to complement the 401(k)-this is perfectly
allowable and one of the flexibility benefits of a cash
balance plan-he can contribute $107,000 to the plan
annually. Part of that contribution includes a $50,000
annual life insurance premium on a whole life policy
that provides a $1 million death benefit.
Since the $107,000 plan contribution is pretax, the
physician takes that amount off his taxable income.
Moreover, since he is in the 40 percent tax bracket, he
will save $42,800 in taxes each year.

Keep in mind
Maximizing investment returns is not the goal of
a cash balance plan. Return on a 401(k) plan could be
higher if stocks are doing well. Of course, with higher
401(k) returns comes greater risk.
A cash balance plan, by contrast, is all about
predictable returns of 5-6 percent per year coupled
with the additional advantages of tax deductibility.
Two strategic keys are lowering risk and keeping more
money for yourself. At the same time, a cash balance plan
allows the practice owner who needs to play catchup on
his or her retirement savings to put retirement planning
on a faster pace. The older the practice owner is, the
more he or she can put into the plan.
Maintaining lifestyle is another retirement planning
issue related to a cash balance plan. While it might
seem like a good idea to pump up retirement savings,
this should not be done at the expense of a business
owner's lifestyle. For example, we are working with
a business owner for whom the actuary established a
maximum annual plan contribution of $150,000. But
because the owner is shouldering college expenses, we
decided to put in less. Having this flexibility to adjust
plan contributions from year to year to reflect lifestyle
changes is, in the long run, another huge benefit of a
cash balance plan.

cash balance plan allows the practice owner to sock away
much more money year to year. In addition to putting
retirement savings on a fast track, a cash balance plan
also enables the practice owner to enjoy substantial tax
savings. Also, the plan assets in a cash balance plan are
protected from creditor claims by ERISA (Employee
Retirement Income Security Act).
A further benefit of a cash balance plan, in addition
to saving large chunks of money for retirement, is that the
life insurance component of the plan can be structured
to produce a stream of income that is entirely tax-free.
Maximizing retirement savings. Ensuring a predictable return. Reducing taxes. Thanks to a cash
balance plan, it all adds up to a triple win in retirement
planning that helps practice owners keep more of their
hard-earned wealth. ■
Note: Investment advisory services offered through
Virtue Capital Management, LLC (VCM), a registered
investment advisor. VCM and Freedom Financial Advisors
of MD are independent of each other. Information provided
is not intended as tax or legal advice, and should not be
relied on as such. You are encouraged to seek tax or legal
advice from an independent professional.

References
1. http://www.kiplinger.com/article/retirement/T047-C000-S004-the-pros-and-consof-cash-balance-plans.html

Key takeaways
For practice owners looking to supercharge retirement
savings, a cash balance plan can be a smart way to go.
The closer a person is to retirement, the more important
it is to maximize savings. Compared to a 401(k) plan, a

orthotown.com \\ NOVEMBER 2017

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Table of Contents for the Digital Edition of Orthotown November 2017