A sophisticated way to RETIRE


A select group of entrepreneurs are taking advantage of a more sophisticated retirement solution that most business owners are unaware of, let alone, benefiting from. 

A “typical” retirement plan may not serve business owners’ best financial interests. 

Sophisticated retirement solutions, such as Cash Balance Defined Benefit plans, may enable business owners to make sizable contributions and receive large tax deductions.

Many business owners have a retirement plan called a Defined Contribution Plan, such as a 401k, because they have become a popular way for people to help save for retirement. 

However, business owners are a unique group with unique needs. We find business owners are not utilizing retirement plans as effectively as they could. 

The issue for the business owner is the “typical” retirement plan is mainly for the employees and it limits the amount of money that an owner can contribute. This can be a problem when you are starting your retirement savings a little later in life. 

One of the unique aspects of a business owner, we find, is that while their business is growing, they are often using all available excess cash to fund the growth of the business. As the business finally gets to a point where it is producing significant amounts of cash flow, the business owner could be in his or her 40’s or 50’s or maybe even 60’s. At that point they have a lot of catching up to do for their eventual retirement. 

The Cash Balance Defined Benefit plan can help a business owner solve this problem.

Defined Benefit Plans were common years ago but have fallen out of favor with large corporations. However, the Cash Balance Plan version may be more beneficial for small businesses, such as a family-run business, that generate good revenue and have relatively few employees.

Cash Balance Defined Benefit Plans have similar characteristics to Defined Contribution Plans such as, contributions are tax deductible and will not generate income tax until the funds are withdrawn from the plan. However, a big difference with a Cash Balance Plan, as opposed to a ‘typical’ retirement plan, is that a Cash Balance Plan allows you to contribute much larger sums of money annually. 

These plans allow for large contributions for the owner/employee of up to $300,000 depending on factors such as income and age. That is a lot more than the $57K max (as of 2020) allowed in s a 401k plan. The employer/owner gets the deduction, and the employee/owner does not pay income tax until the money is withdrawn at retirement. Therefore, saving current tax and helping to catch up on funding his or her inevitable retirement. 

Additionally, if you combine a 401k and Cash Balance Defined Benefit Plan it can allow for even larger contributions. 

A Washington Post story, “How Jeb Bush’s firm made him rich – and created a nest egg for his family,’ illustrates how Jeb Bush, the former Florida governor, turned speaker/consultant, used this sophisticated retirement strategy to acquire wealth for him and his family. 

 It appears to me that business owners may not be utilizing the advantages of a Cash Balance Defined Benefit Plan because they have not been educated enough about the plan to allow them to determine whether it is appropriate for them. 

As with all advanced planning solutions, it is important to understand the benefits and drawbacks for your circumstances. Contact your financial advisor to see if this type of plan would be right for you. 

Thomas M. Dowling CFA, CFP®, CIMA® is an Executive Managing Director with Aegis Capital Corp. Dowling has been featured in various publications and has been a guest speaker at various financial events. Locally, he is a member of the Rotary and sits on the Board of Directors of the Hilton Head Baseball Association, Hilton Head Boys and Girls Club and the Town of Hilton Head Parks and Recreation Commission. Dowling is a Registered Representative and Investment Adviser Representative of and offers securities products and investment advisory services through Aegis Capital Corp Member FINRA/SIPC. The opinions expressed are for information purposes only and is not an offer, recommendation, or solicitation of any product, strategy or transaction. Any views, strategies or products discussed may not be appropriate or suitable and may be subject to risk. He can be contacted at tdowling@aegiscap.com or 843-715-2239.