The Income Shield: Defined Benefit & Cash Balance Plans
The Income Shield: Defined Benefit & Cash Balance Plans
Too rich for a 401(k)? How business owners and high-income professionals can deduct $200k+ annually and slash their taxable income instantly.
Executive Summary
- The Problem: Successful business owners and doctors maximize their 401(k) ($69k limit with profit sharing), but still face massive tax bills on hundreds of thousands of dollars in remaining income. A 401(k) is too small a bucket.
- The Solution (DB Plan): Unlike a 401(k) (Defined Contribution), a Defined Benefit (DB) Plan promises a specific payout at retirement. To fund this future promise, the IRS allows you to contribute (and deduct) huge sums today ($100k – $300k+) depending on your age and income.
- Cash Balance Plan: A modern hybrid of DB and 401(k). It creates a hypothetical account balance for each participant. It is the preferred structure for medical groups and law firms to allow partners to defer massive taxes.
The Mandatory Commitment
A 401(k) is discretionary (you can stop contributing in bad years). A DB Plan is a mandatory obligation. You must make the actuarially determined contribution every year, regardless of profit. Do not start this unless you have stable, high cash flow for 3-5 years.
Mechanic: The Super-Bucket
$275k+
Annual Deduction
Age Based
Older = Higher Limit
Actuary
Required Calc
Creditor
ERISA Protection
Simulation: 50-Year-Old Doctor (Income $600k)
Annual Tax Deduction Potential
| Feature | 401(k) Plan | Defined Benefit / Cash Balance |
|---|---|---|
| Contribution Limit | Fixed ($23k + Employer) | Actuarial (Can exceed $300k) |
| Key Factor | Salary Only | Age + Salary (Older is better) |
| Flexibility | High (Discretionary) | Low (Mandatory Funding) |
“If you are paying $200k in taxes, you are effectively buying a Ferrari for the government every year. A DB Plan lets you buy that Ferrari for your own retirement instead.”
Essential Resources
INTERNAL
BMT Playbooks