What is a Cash Balance Plan and how can it Help Minimize my Tax Bill?
Cash balance plans are typically used during a dentist’s peak earning years over the second half of their careers. They are as much of a tax mitigation strategy as they are a retirement planning strategy. Cash Balance Plans allow owners to aggressively reduce their taxable income by funding a retirement plan well more than a traditional 401k and profit-sharing limits ($64,500 age50+ 2021).
While everyone’s situation is unique, Cash Balance Plans, when structured properly, can be a powerful resource from a retirement savings and tax planning perspective. When selling a dental practice, the after-tax proceeds of those sells typically only fund a few years or retirement lifestyle. Thus, advance planning is needed to help mitigate tax liabilities and plan for financial independence.
Benefits of a Cash Balance Plan
- The entire contribution is an allowable business deduction, reducing taxable income and adjusted gross income (AGI) -> immediate and substantial tax deductions for pass-through entities
- Earnings grow tax-deferred and are not subject to taxation until distributed
- Accelerates retirement savings with contribution amounts potentially exceeding $300k per year
- Potential tool for succession planning to defer income on taxable proceeds of a business sale or transition
Implemented Case Studies
Selling Dentist 1, Age 57 – Owner of 3 Locations and Real Estate
2020 – One location sold, and a cash balance plan was established. Contributions were frontloaded and taxable income was reduced by over 420k. A 420k contribution was made to the cash balance plan. 97% of all contributions went to the selling doctor. Over 200k saved in taxes.
2021 – Real estate will be sold from one of the practices. Another 300k-400k contribution will be made for the selling doctor to help minimize his tax bill and aggressively fund his retirement.
Selling Dentist 2, Age 64 – Owner of Dental Management Company
2020 – Management company was sold, and new entity was formed where the selling dentist continued another line of business. Taxable income was reduced by over 500k and a 500k contribution was made to a cash balance plan. 90% of all contributions went to the selling doctor. Over 250k saved in taxes.
Selling Dentist 3, Age 65 – Practice Sold to a Corporate Owner. Negotiated a guaranteed consulting payment for the following three years.
2020 – Sell of practice, which lead to the establishment of a CB Plan. Taxable income reduced by 300k and a 300k contribution was made to a cash balance plan. 96% of all contributions went to selling doctor. Over 150k in taxes were saved.
2021 – Guarantee consulting payments start for three years. New entity established to received consulting payments. The doctors three adult children were added to “payroll” of new entity and a cash balance plan was established for the benefit of the selling doctor and children.
Cash Balance Plans are one of many creative, advanced planning strategies to help mitigate taxes. These plans are complex, and we encourage you to leverage a team of experienced advisors to help compliantly implement any advanced strategies referenced. If you would like to discuss in more detail, please feel welcome to connect. ryan@navipathfinancial.com www.navipathfinancial.com
Ryan Whitley, CFP®, is a Certified Financial Planner and Co-Founder of NaviPath Financial. His firm specializes in ongoing and comprehensive financial guidance to dental practice owners. They are independent and act as fiduciaries to serve your best interest.
Securities offered by Registered Representatives of Private Client Services (“PCS”). Member FINRA / SIPC. Advisory services offered by Investment Advisory Representatives of RFG Advisory, a registered investment advisor. Private Client Services, Navipath Financial, and RFG Advisory are unaffiliated entities
Neither RFG Advisory and its Investment Advisor Representatives nor Private Client Services and its Registered Representatives provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. Please consult your own tax, legal, and accounting professionals for guidance on such matters.
