The Beauty of a Cash Balance Plan

By Published On: June 5, 2023Categories: Med Spa Money3.7 min read

Insights for med spa owners looking to accelerate their retirement savings and take advantage of tax deduction opportunities

When it comes to retirement savings, cash balance plans are an effective tool that can help med spa owners put away extra money for their golden years. A lesser known but attractive option for entrepreneurs who’ve focused on growing their business and are ready to catch up on retirement savings, cash balance plans can amplify your efforts beyond an IRA or a 401(k).

If the recent boom in the medical aesthetics industry has pushed you into a higher tax bracket, cash balance plans offer an additional benefit of potentially lowering your taxable income. Cash balance plan contributions are treated as tax deductions, thereby reducing your ordinary income dollar for dollar. By lowering your business profits, your money can grow tax-deferred while possibly saving you thousands of dollars in annual taxes.

If you’re a med spa owner who’d like to boost your retirement savings while lowering your tax bill, the following guide can help you determine if a cash balance plan is right for you.

What is a Cash Balance Plan?

A cash balance plan is a type of retirement plan that you can set up for yourself and your med spa employees. Under this plan, the business makes two contributions toward the employees’ accounts: pay credit and interest credit. Pay credit is a percentage of an employee’s compensation paid directly into their plan account. Interest credit is a guaranteed rate that’s linked to an index, such as the 30-year Treasury bond.

As the med spa owner, you’re obligated to make company contributions as determined by the plan document. In this way, a cash balance plan outlines the contributions that you’ll make and the investment earnings allocated to plan participants. Because each participant has their own account, cash balance plans also require an actuary who handles management and issues annual statements.

Is a Cash Balance Plan Right for My Med Spa?

When launching med spas, many owners first focus on growth and put retirement savings on the backburner. If this applies to you, a cash balance plan can offer an opportunity to catch up on your retirement savings.

However, contributions are age-dependent. For that reason, cash balance plans are well suited for owners with fewer and younger employees, as well as partners and owners interested in saving more than the maximum allowed 401(k) contribution and bringing down their taxable income.

Regardless of your situation, it’s important to keep the following pros and cons in mind when deciding if a cash balance plan is right for your overall wealth strategy.

Pros of a Cash Balance Plan

Cash balance plan contributions can yield long-term benefits to you as the MedSpa business owner.

  • They’re deductible business expenses that lower your ordinary income dollar for dollar.
  • Owners and partners can receive a different contribution amount than employees.
  • Contributions can significantly increase your retirement savings
  • If you’re over 40, you can contribute beyond what traditional retirement plans allow.
  • In an industry with high turnover, offering cash balance plans are an opportunity to differentiate your total compensation package and attract / retain top talent.
  • Exiting employees can receive the vested portion of their account balances.
  • With specialists managing the plan, portfolio investments can be tailored to meet your investment objectives.

Cons of a Cash Balance Plan

The benefits of cash balance plans also come with potentially costly tradeoffs.

  • It’s an ongoing financial commitment that cannot be quickly unwound.
  • It’s difficult and expensive to cancel.
  • Your med spa needs a steady cash flow to continue contributing to the plan annually.
  • If your employees are close to your age, you may end up contributing sizable amounts to their accounts.
  • You must work closely with an experienced cash balance plan advisor to set up the proper structure.

Leveling the Field for Med Spa Owners

Establishing a cash balance plan for your business can be a smart personal finance decision, especially if you’re looking to maximize your retirement savings and minimize your tax liability. At Med Spa Money, we work with plan administrators and tax consultants to evaluate the potential impact that this vehicle could have on your business and evaluate whether a cash balance plan might make sense as part of your overall wealth accumulation strategy.

For more information, reach out to our team and let us help you evaluate whether a cash balance plan may meet your personal and business financial goals.

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