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Key Takeaways

• Small businesses owners could build wealth of $2 million though a Cash Balance plan
• Cash Balance plans allow larger tax-deductible contributions than SEP-IRAs or 401(k)s
• If you’re a small business owner earning high income, consider opening a Cash Balance plan to reduce taxable income

As a small business owner, it’s highly likely that you’re too busy to plan ahead for your taxes and apply strategies to reduce your tax bill. In the article “The $100,000 Tax Deduction Most High-income Business Owners Miss,” Certified Financial Planner David Rae shares examples of two small businesses that were missing out on a $100,000 tax deduction that could cost each business an additional $500,000 in taxes for the next decade.

Benefits of 401(k) Profit-Sharing Plan for Small Business Owners

The first small business had enough money to fully fund a 401(k) profit-sharing plan with his spouse. Because the couple is over 50, they are eligible to max out their 401(k) with $58,000, plus the $6,500 catch-up contribution, for a total deduction of $64,500 each. When combined it would allow for a $129,000 tax deduction. If the couple put $129,000 into the 401(k) each year for the next ten years and earned 10 percent per year, the combined balances of their 401(k)s would be more than $2 million.

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Another small business owner who earned $1,000,000 annually wanted to lower his taxes and save for retirement. The business owner who had a SEP IRA could open a Cash Balance plan and switch from his current plan to a solo 401(k), allowing him to make a catch-up contribution of $6,500 each year. Depending on how the Cash Balance plan is designed, he could put away an additional $100,000. The total tax-deductible contributions would be around $164,000, greatly increasing his tax savings during retirement.

4 Easy Steps: Here’s how you can get started on opening a Cash Balance plan.