Your Cash Balance Plan Can Hold More Than Stocks and Bonds
A real estate developer I work with holds rental properties, including a condo in Telluride, inside his Cash Balance plan in the form of LLC partnership interests, all owned by the plan's trust. He can't use these properties personally just yet without risking a prohibited transaction, but the rental income flows back in tax-deferred and expenses are paid directly from the trust. The properties have also appreciated over the years.
When the plan reaches its maximum funding and terminates, the properties can move into his own name at appraised value, with the cash rolling into an IRA tax-deferred. That step has to be structured carefully to stay clear of the prohibited-transaction rules, and it's exactly what we plan for. At the end of the day, he gets a tax deduction on the money going in, the investments grow tax-deferred while they are in the plan, and he walks away owning the properties personally. That will be the time for his family to enjoy that mountain condo!
Pension plans are not limited to stocks and bonds. Real estate, trust deeds, gold, art, wine — these are all what is known as alternative assets, meaning anything that isn't a publicly traded security. If you already invest in these kinds of assets outside your retirement accounts, you can do it with tax-deductible dollars inside a Defined Benefit or Cash Balance plan. This is different from what's available in most IRAs and 401(k)s — while self-directed IRAs can hold these assets, pension plans offer much larger annual contribution limits and the contributions are fully deductible to the business. A 401(k) can hold some alternative investments too, but, again, the contribution ceiling is far lower. For a high-income owner looking to put serious money into assets they already understand, the pension plan is where the real capacity is.
It works best when owners invest in what they already know. And I've seen my fair share of creative applications over the years. A client in the wine industry held a high-value collection in his plan, had it appraised annually, and took the collection home when the plan was fully funded. Another client held gold coins, which are one of the simpler options because gold has a clear market price by weight. One of the more unusual situations involved a client who kept fine art in his plan. The art was valued annually and the tax benefits were real, but the unfortunate trade-off was that the art had to stay in storage or on loan to a gallery — the no-personal-use rule applies to everything in the plan, regardless of what the asset is.
The practical requirements are manageable, especially for owner-only plans. You need a fair market valuation annually for anything that isn't publicly traded, and if employees are in the plan there's a higher ERISA bond and a longer 5500 filing. What matters most is having a TPA that understands these investments and can help you avoid prohibited transactions, which is where most of the risk lives. We work with this regularly at Heliodorus.
On the speculative end — someone I worked with invested in a startup through his Roth 401(k) and it grew a hundred times over. Perfect outcome in a Roth: tax-free growth, no funding complications. If that had been inside a pension plan, it would have been massively overfunded with no clean way out. Cryptocurrency falls into a similar category. It can technically go in a pension plan, but the price swings throw off funding calculations from year to year. Crypto fits better in a 401(k) where there's no funding target to manage.
If you or your clients already invest in real estate, trust deeds, or other alternative assets, this is worth exploring. Happy to talk through specifics. You can also subscribe to receive articles like this monthly at heliodorus.com/newsletter
Alex Free, EA, CPC, QPA, QKA
Principal & Enrolled Actuary
Heliodorus LLC
