Solo Cash Balance Plan: 5 Powerful One Person Strategies!

One person business owners have wonderful retirement options. They can open one of the best retirement structures: the solo cash balance plan.

Many business owners have heard of a solo 401k plan. But few have ever heard of a cash balance plan. There are a few similarities, but there are some sizable differences.

Now that you have an overview of some of the benefits, we will take a look at the specific structure and examine how you can set a plan up. Let’s get started.

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What is a solo cash balance plan?

A solo cash balance plan is simply a one-participant plan. The formula and plan document are tailored to the self-employed person’s business and desired contribution. Because a solo cash balance plan is considered a pension, it allows the business owner to make large, tax-deductible contributions that will exceed the limits of a 401(k) plan.

How Does a Solo Cash Balance Plan Work?

Can an individual have a cash balance plan? Certainly. A solo(cb) plan is a cash balance plan created for self-employed business owners. A solo(cb) is technically a pension and allows for large contributions and tax deductions that far exceed other retirement plans.

But a solo cash balance plan works a little differently. There is no employee contribution. The company makes a contribution to the plan based on an actuarial determined calculation. The goal of which is to provide you with a lump sum or specified annuity payment upon retirement.

However, within the plan documents the employer offering the benefit will state an “interest crediting rate”, referring to an interest contribution they will make to the account. 

This allows for more steady growth of the plan, without the volatility of potential stock market fluctuations that may occur.  The interest charge fee is usually anywhere from 4%-5% annually of the amount that has been contributed.

The funds in a cash balance plan are usually professionally managed by a investment firm. They are usually invested into mutual funds and other liquid investments.

But you can also put life insurance in a cash balance plan. The investments are directed by the investment firm based on the employer’s investment objectives. The employees technically have no say in the investments made.

Some general rules of a solo cash balance plan include:

  • Full tax deferral retirement structure;
  • Ability to combine the plan with other structures like a 401k plan;
  • Contributions are made by your company as a percentage of compensation;
  • The rate of return is determined by the plan document as an interest credit that is deposited by the single participant employer along with the regular yearly compensation contributions.

Single Participant Plan Rules

The IRS has established specific rules for different qualified one person retirement accounts. Among those rules are contribution limits. Contributions to most retirement vehicles have tax benefits and are not to be taken advantage of.

Unlike other qualified retirement plans, cash balance plan contribution limits are unique. There is not actual a set dollar amount. Rather, each contribution limit is different for each employee’s situation.  Within the plan documents, are defined how contribution limits are determined.

Contribution limits are age dependent, allowing older employees to contribute more as they near retirement, and younger employees to contribute less. The contribution limits are dependent upon age, length of service with the company, position, and job responsibilities.

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The contribution limits of 401(k)s, IRAs and other retirement vehicles vary as well, but each has a set yearly limit.  One person cash balance plans allow one to take advantage of the contribution limits of multiple retirement accounts, resulting in an even higher aggregate annual limit for those wanting to save heavily for retirement.

What About Independent Contractors?

While any business industry can be a good candidate, professional service firms can work great. Professional service firms tend to have less overhead and higher earnings power than many business types.

Let’s look at some professional service firms that could benefit from a cash balance plan:

  • Attorneys and law firms
  • Accountants and CPAs
  • Engineers
  • Physicians
  • Actuaries
  • Psychologists
  • Dentists
  • Chiropractors
  • Architects

Law firms and medical groups have historically been significant proponents of cash balance plans. Obviously, a significant reason why is because of consistent high income. But these practices are looking for a way to get more money into practitioner’s retirement accounts.

A critical feature of a cash balance plan is the maximum contribution an employer can make to an employee’s account. The maximum contribution is determined by the Internal Revenue Service (IRS). It is based on a formula that considers the employee’s age, pay, and overall funding level of the plan.

It’s important to note that these maximum contribution limits apply to the combined contributions from both the employer and the employee. Suppose the employee also contributes to a 401(k) plan or defined contribution plan. In that case, the total contributions from both plans cannot exceed the defined contribution plan limit.

Overall, the maximum contribution to a cash balance plan is an essential consideration for employers and employees planning for retirement. By understanding the contribution limits and other rules that apply to these plans, you can make informed decisions about your retirement savings strategy and ensure that you make the most of your retirement benefits.

Cash Balance Plan and Solo 401k

The good news is that if you already have a solo 401k, you can still continue to use it. However, the IRS limits the profit sharing contribution.

Built into a solo 401k document there is usually a profit-sharing component. This will allow a 25% profit sharing contribution based on compensation.

Eligible for QBID (Section 199A) ✅Mandatory contributions
Flexible funding levelsMore expensive to maintain
Front loaded contributions ✅Conservative investments
Tax-deferredComplex design & administration

But when a solo 401k is combined with a cash balance plan, the profit sharing is limited to just 6%. So, you will use a little on the profit-sharing, but the cash balance plan will more than make us the difference.

Withdrawal Rules for One Person Cash Balance Plan

Part of the reason that retirement plans are offered is to incentivize consumers to save money for retirement.  This is done by creating penalties for funds that are withdrawn earlier than the stated age of retirement defined within each type of retirement account.

Solo cash balance plans will allow you to withdraw funds without any penalties only if you withdraw the entire balance in the account.  Any withdrawals that are made will still need to be taxed as ordinary income. 

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If a withdrawal is made in an amount less than the account balance, a 10% penalty will be charged, along with the taxes that will be owed on the amounts withdrawn.

Should one leave their employer for a new career opportunity or job opportunity, cash balance plans are able to be rolled over into an IRA so that you can keep contributing to the balance for retirement.

What About a Solo Cash Balance Plan Rollover?

Can you rollover a one person cash balance plan? Yes. Cash balance plans can be rolled over into an IRA upon certain qualifications.

The most common circumstance that this will happen is when the company terminates the plan based on a fundamental business change. Once the plan is terminated the balance is rolled over into an Individual Retirement Account (IRA).

How to structure a solo cash balance plan and solo 401k:

  1. Make sure you have no qualifying employees

    If you have employees who work over 1,000 hours and are at least 21 years of age, you may have to include them in the plan. The benefit of a solo plan is that you don’t have to do employee cross-testing. The plans are simpler to maintain and have lower administration fees.

  2. Coordinate your plan document with your administrator

    Discuss your employee situation with the third party administrator and make sure you customize the plan accordingly. Your TPA can also provide multiple illustrations with different funding levels. Plans can be tailored to your specific business requirements.

  3. Locate a custodian to handle the investments

    Since you are the trustee of the plan you will need to find a custodian to handle the investments. Schwab, Vanguard and Fidelity are popular options. But plans can also be self-directed into non-qualifying assets like real estate, private notes, bitcoin and other alternative asset classes. If you choose to invest in non-qualifying assets, there are many compliance issues, so make sure to discuss with your administrator.

  4. Sign the plan

    Once you have reviewed the plan with the TPA and the custodian make sure that you get the plan documented and signed before the deadline. This part of the process sounds easy. However, we have had clients come to us with plans that have no signature evidence.

  5. Fund the plan

    Make sure that the contribution is completed before you file the tax return. The IRS does not allow late contributions. Thankfully, you should have plenty of time to fund the plan, but make sure funding is completed prior to Sept 15th.

Solo Cash Balance PlanSolo 401k
No employee deferral allowedEmployee deferral allowed
Permanent plan designAllows profit sharing contribution
Much larger contributionsSubject to annual 415 limits
Custom plan document and designLimited contribution levels
High administration costsInexpensive to set up and maintain

Final Thoughts

Are you a top candidate for a single participant plan? If you have the cash flow to make substantial retirement contributions and are looking for large tax deductions, then a plan may be just what you are looking for.

But before you jump in, make sure you discuss your situation with a qualified administrator and your CPA. These plans can be complex and you want to ensure that all parties are in the loop.

Paul Sundin

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