Definition
A cash balance plan is a type of defined benefit retirement plan that lets business owners and high-earning professionals contribute far more on a tax-deductible basis than a 401(k) allows.
How It Works
Each participant has a hypothetical account that grows with annual employer contributions and a guaranteed interest credit. Because contribution limits rise sharply with age, the plan lets older owners compress many years of retirement saving into a shorter window. It is often paired with a 401(k) profit-sharing plan to maximize total deductible contributions.
Example
A 55-year-old practice owner contributes well over $200,000 in a year through a cash balance plan, deducting the full amount and sharply reducing taxable income.
When It Works Best
It works best for profitable businesses with few employees or a favorable age mix, especially older owners trying to catch up on retirement saving before an exit.
Who It Applies To
Business owners and professionals with strong, consistent profit who can fund large annual contributions.
Watch-Outs
Contributions are largely mandatory once the plan is set, the plan must provide meaningful contributions to eligible employees, and it requires an actuary and ongoing administration.
