Can You Combine a Cash Balance Plan with Other Retirement Plans? The #1 Guide


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Cash balance plans are great retirement structures. But you have to be careful if you want to combine them with other retirement plans.

In most situations, people come to us looking for a cash balance plan and they already have a retirement structure in place. Sometimes they have already funded the plan. But sometimes they have the structure in place but have not funded it for the current year.

Unfortunately, many believe you can layer retirement plans on top of other retirement plans. This is not the case.

In many cases, the IRS prohibits certain plans from combining. But in many cases, the IRS places certain restrictions or limitations. As you would assume, the IRS does not want people to combine plans on top of plans to generate substantial retirement savings and significant tax deductions.

But can you combine plans with other retirement structures? In this post, will answer this question and give you some insight into how to structure your plans to be most effective.

The table below summarizes the rules when combining a cash balance plan with other retirement plans:

PlanAllowedNot AllowedAllowed W/Restrictions
401(k) Deferral
401(k) Profit Sharing
Model SEP
Non-Model SEP
SIMPLE
Traditional IRA
Roth IRA

Can you combine a cash balance plan with a 401(k) plan?

The two most popular retirement plans are 401(k)s and steps. In most circumstances, clients already have one of these plans when looking for a cash balance plan.

If you already have a 401(k) plan, I have good news. You will likely be able to keep that plan and combine it with a cash balance plan. The problem is that your profit-sharing will be limited to 6% of your W-2 or 6% of your deemed wage if you are a sole proprietor.

So, you will lose a contribution on the 401(k) profit-sharing plan. Clients often lose out on $20-$30,000 of contributions. Fortunately, they can pick up $100,000 plus on the cash balance plan side, so it makes sense to have your 401(k) limited if you’re looking for significant cash balance plan contributions.

What about a SEP?

But what about combining it with a sap? Unfortunately, this is where it gets a little sticky. There are technically two kinds of steps. One is called a model SEP, which was established using IRS form 5305. If you use this form to set up your plan, you are prohibited from having a cash balance plan.

But if you have a custom plan design called a non-model SEP, you can combine the structure with a cash balance plan, but it will still limit your profit-sharing to 6%, just like the 401(k) profit sharing noted above.

What about a SIMPLE IRA?

I don’t have good news for you if you have a SIMPLE IRA. You can’t combine the simple with a cash balance plan or any other retirement structure.

Simple plans are only good for people looking for limited contributions. They don’t allow for significant contributions if you’ve had a good year. That makes these plans very inflexible, and we highly discourage them if you think you want to make larger contributions in future years.

What about combining a cash balance plan with a traditional IRA?

You certainly can combine a cash balance plan with a traditional IRA. However, based on your income will determine whether your IRA contribution is deductible or nondeductible.

The IRS issues phase-out limitations when you combine an IRA with another retirement structure. The majority of our clients have income above $300,000 a year. As such, any contribution they make to a traditional IRA would be nondeductible. But you certainly can make it. It’s just not something I would typically advise.

Can you combine a cash balance plan with a Roth IRA?

The answer here is similar to the traditional IRA but with a few more restrictions. Again, the IRS limits IRAs based on your adjusted gross income. You can find out more about that here.

Because most of our clients have income above $300,000, they are well above the phase-out ranges to make the IRA. So if you’ve made the IRA, you will have to take the money out to avoid penalties. Whereas if you have a traditional IRA and thought you would be able to get a tax deduction if you don’t take the money out, you can still leave it in the plan. It will just be nondeductible.

If you had your heart set on contributing money to a Roth and a cash balance plan, you have some options. You can make a Roth 401(k) contribution. This way, you can get a tax-free contribution while contributing substantially to the cash balance plan.

Bottom line

In a perfect world, you could add one retirement plan on top of another without any restrictions or IRS issues. You could fill up one bucket and then add subsequent retirement funds to each additional bucket. That would be great. I’m sure a lot of my clients would like that.

However, as you can see in this post, you’re an adult able to or restricted from contributing to multiple retirement plans during the same year.

Suppose you are considering setting up a cash balance plan. In that case, I always tell potential clients to hold off on making contributions to any existing retirement plans until they decide what you want to do. You don’t want to be trapped in a plan that doesn’t work well with your cash balance plan.

Paul Sundin

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