A recent Wall Street Journal article about Jeb Bush focused on his retirement plan contributions.  According to the article, over the last five years the former Florida government was able to contribute an average of $350,000 (before taxes) a year into his retirement plan.

 

Small business owners who have strong cash flow and who find that the $53,000 a year (for 2015, $59,000 if 50 or over) they can make in 401k and profit sharing contributions is easily achievable and want to do more should seriously consider a plan similar to Jeb's, known as a cash balance pension plan.

 

Pension plans must provide benefits to all employees who meet the eligibility criteria, so sometimes this makes sense and sometimes not.  Here's a particularly juicy example.  Let's say you're a 60 year old dentist with a 28 year old assistant (we'll call her Flossy).  You earn $400,000 and Flossy makes $35,000.  You're maxing out the 401k and profit sharing plan for $59,000 in contributions, and you're giving Flossy $2,500 in profit sharing and safe harbor contributions.

 

In this example, you'd be able to contribute an additional $197,000 in pre-tax retirement savings.  Here's the thing:  because the contributions are based on both age and salary, your required contribution for Flossy?  An extra $525.  I've had clients who have been able to put away more than $300,000 a year in such combinations, thus reducing their annual tax bill by as much as $140,000.

 

Another attraction to this plan:  unlike more traditional pension plans (think GM), these can be run for 5-10 years or so, and upon termination the assets can be rolled directly into one's IRA.  This effectively takes a defined benefit plan and turns it into a defined contribution plan, and the burdens of running a pension long-term are effectively terminated.

 

As with everything involving the Feds, this is not an easy plan to manage, but its complexity simply requires hiring an actuary, so while it adds in total fees for the plan, it greatly simplifies its creation and monitoring.

 

There are fewer and fewer tools available to make significant tax-advantaged savings.  If you're the owner of a very successful business (even as a sole proprietor) and your advisor hasn't looked at a cash balance plan for you find out why.  It's an excellent tool.