Investing for retirement can be problematic for professionals in partnerships or other types of closely held firms. These individuals tend to spend their early careers focused on building their business. By the time they are ready to start saving money for retirement, standard retirement saving vehicles such as 401(k) plans can shelter only a small portion of their income. The rest is subject to taxes, often in the highest brackets.
Cash balance plans can help. A type of defined benefit retirement plan,1 cash balance plans have much higher annual contribution limits than 401(k)s—nearly 10 times higher for older individuals, enabling participants to build substantial tax-deferred accounts. If individuals earn enough to take advantage of these contributions, they can accumulate secure retirement portfolios much more quickly than with traditional retirement plans. For this reason, the plans tend to be most popular with firms with relatively high-paid professionals, such as law firms—although any type of business may find them attractive.2
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