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TAX / PERSONAL FINANCIAL PLANNING

of Income, Deductions, Credits, etc.; and line 31 of a cash balance contribution.
Schedule C, Profit or Loss From Business, as primary ■ Top marginal income: The top marginal
sources for determining client salaries/earnings. tax rate is 37% for individuals earning over
Cash balance contributions are set annually to $539,900 ($647,850 for married couples in
ultimately target the finish line pension balance of 2022). A cash balance contribution that reduces
$3.1 million, and the contribution amounts vary income for a married couple below $647,851
by year based largely on the age and income levels will result in tax savings plus a reduction in the
of participants, estimated years to retirement, and marginal income tax rate.
the pension’s long-term investment experience. ■ Personal state taxes: As noted above, state
Each year, the actuaries calculate the numbers for tax rates can range widely from zero to 13.3%.
your clients and then provide a range of allow- Plan contributions can reduce the amount of
able contributions. Older individuals are allowed tax owed.
higher contributions because there is less time to ■ Personal investment tax: A CBP deduction
compound and accumulate the maximum balance may put a household under the net investment
of $3.1 million prior to retirement. Some examples income tax threshold, eliminating the need to
of allowable annual contribution amounts for 2022 pay the 3.8% net investment income tax on
appear in the table, “Sample Annual Contribution unearned net income imposed on individual
Limits by Age.” earnings over $200,000 ($250,000 for married
couples). This surtax applies to investment
income such as capital gains, dividends, and
rental property income.
Sample annual contribution limits by age ■ Medicare tax: There is an additional 0.9%
Individual’s Cash balance plan Combined with Total Medicare payroll tax on wages and self-
age contribution limit 401(k) contribution employment income above $200,000 ($250,000
55 $222,000 $67,500 $289,500 for married couples). Cash balance contribu-
60 $285,000 $67,500 $352,500 tions can lower income to reduce this tax.
■ Qualified business income (QBI) deduction:
65 $295,000 $67,500 $362,500 For some business owners and professionals, a
CBP contribution could result in eligibility for
the QBI deduction. This deduction is provided
to companies that are structured as passthrough
entities — sole proprietorships, partnerships,
and S corporations. Taxpayers who qualify
TAX BENEFITS receive a 20% deduction of the income on
A significant, if not the most important, element their tax return. Many professional businesses
of CBPs is the tax deduction they provide. When (doctors, attorneys, consultants, actuaries, CPAs,
federal income tax rates top out at 37% as they do etc.) do not qualify for the QBI deduction
now, cash balance contributions can reduce taxes unless their income is below certain levels
substantially for key earners — very often tens ($220,050 for a single return and $440,100 for a
of thousands of dollars in annual tax savings. In married couple filing a joint return for 2022).
addition to federal tax savings, plan contributions
can lower state and local taxes, which range from LOGISTICS OF A CASH BALANCE PLAN
zero to as much as 13.3% in California. To make a CBP compliant and successful, a variety
In all the following ways, contributing to a of players are needed. These include a custodian
CBP may reduce or eliminate taxes: (who holds the plan’s assets); a recordkeeper (who
■ Corporate taxes: Cash balance contributions tracks each participant’s balance in the plan, includ-
are a deduction against business income. ing contributions and withdrawals and investment
■ Personal federal taxes: If a shareholder or earnings); the third-party administrator (who
partner receives a Schedule K-1 as a result of ensures all the ERISA and DOL rules are followed,
corporation or partnership profits, the indi- such as the preparation of an annual actuarial re-
vidual’s personal federal taxes can be reduced by port, as well as that regulatory updates are provided

30 | Journal of Accountancy January 2023