Jeb Bush’s Supercharged Retirement Plan

Last week, presidential candidate Jeb Bush released his income tax returns for the last thirty-three years. News outlets sliced and diced the returns to analyze his income, his tax payments, and the significant wealth he has accumulated over the years. What caught my attention were the reports of a vaguely-described pension plan in which he was stashing away pre-tax for the last seven or eight years over $300,000 per year from his consulting firm earnings. That’s a whole lot more than a firm can contribute for an employee or an employee can contribute under most circumstances to better-known qualified retirement plans.

The pension plan must be a cash balance plan, probably combined with a 401(k) and profit-sharing plan. Some of my clients have used this perfectly legal and powerful savings tool to great advantage. Some large companies use cash balance plans, primarily as successors to typical defined benefit retirement plans that are frozen. However, most users are small businesses and, generally, professional service firms.

The cash balance plan is a defined benefit plan. Instead of promising a defined income stream in retirement, the plan is designed to provide a defined cash balance at retirement. The cash balance plan is most effective in cases where the employer has a few more mature, highly paid owner/employees and a staff of mostly lower-earning younger workers. Combined with a defined contribution plan, usually a 401(k) with profit sharing, the cash balance plan allows the firm to contribute for high-paid employees large sums of money, around $300,000 or more for a 60-year old person, over a short period of time for not-so-young high-paid employees. (I do not consider as old a person who is 60 years of age.) The payments are deductible by the employer and tax-deferred for the employee. So, it is pretty easy to see the attractiveness of this plan for doctors, dentists, lawyers and other high-earning professionals.

While the cash balance plan is a wonderful savings tool in the right circumstances, it does come with some burdens. The overall retirement plan arrangement must cover all eligible employees. Most commentators say the cost of coverage is in the range of 5%-8% of payroll for the lower paid employees. The cost of administration is higher than a defined contribution plan. In any case, I would urge every professional service firm having mission-critical mature high earners to consider a cash balance plan.

So, kudos to Jeb Bush and his tax advisors!

VKM