When you are a business owner, tax planning is essential as your income grows. The problem seems to be that when your business takes off, there just isn’t enough time in the day for everything, and tax planning gets ignored. Good news for high-income business owners, one of the best tax-saving retirement plans, the Cash Balance Pension Plan, will have higher contribution limits in 2022.
2022 Cash Balance Plan Limits
The defined benefit pension plan allows for contributions up to $230,000 in 2021. This will increase to $245,000 in 2022. These numbers can be doubled for married couples who both work in the business. You will also need to contribute for employees, which can provide further tax savings.
You Can Combine a 401(k) Plan with a Cash Balance Plan
Many high-income business owners are not aware of the potentially huge tax savings from a Cash Balance Plan. Some have already set up a Solo 401(k) or Profit-Sharing 401(k) plan. The good news here is that a Cash Balance Plan can be added, in addition to the 401(k) plan already in place. There is some complicated retirement planning to maximize the benefits of both plans, but I won’t bore you with those details here.
Celebrate the additional tax saving with higher contribution limits in 2022 for Defined Benefit … [+]
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New Solo 401(k) Contributions Announced for 2022
I also have some good news for business owners who already have Solo 401(k) or Profit-Sharing plans. The total contribution limit to a 401(k) (employee + employer contributions) plan will increase to $61,000 (plus a $6,500 catch-up contribution for those 50 or older) in 2022. Catch-up contribution aside, that is a $3,000 increase over the $58,000 401(k) contribution limit from 2021.
Few Business Owners Are Unaware of the Tax Benefits of a Cash Balance Plan
I don’t have a great answer as to why so few business owners are aware of the tax benefits of a Cash Balance Plan. You do need to have a substantial income to fully benefit from the plan (typically $500,000 or more), and you will need a financial advisor and CPA who know how to use the plans to help you maximize the benefits of a 401(k)-plan combined with a Cash Balance Pension Plan. Beyond that, the tax savings are enormous and worth looking for new tax planning and retirement planning guidance if you are making more than $500,000 and your current financial team is not up to the task of setting up these retirement plans optimally.
To be fair, not all business owners are willing or able to contribute hundreds of thousands of dollars per year into retirement accounts, regardless of how big the tax savings may be. As a Los Angeles-based financial planner, many of my business owner clients could be paying more than 50% in taxes on their last dollars earned (state and federal). Not to mention the painful 3.8% Medicare Surtax on investment income. For some, setting up and fully funding a Cash Balance Plan is a no-brainer. For others, the temptation to spend is too high. That Rolls Royce is beautiful, but the extra $250,000 in taxes you had to pay to get it (instead of fully funding your 401(k) and Cash Balance Plan) is not so appealing, at least to me.