The Super-Sized 401(k): Cash Balance Plans
The Super-Sized 401(k): Cash Balance Plans
The standard 401(k) limit is too small for high earners. How to legally stuff $300,000+ per year into a tax-deductible retirement account using Actuarial Science.
Executive Summary
- The Ceiling Problem: You earn $1M a year. A standard 401(k) allows you to save ~$69,000 (2025 limit). This barely moves the needle on your $400,000 tax bill. You need a bigger bucket.
- The Solution (Cash Balance Plan): This is a type of **Defined Benefit (Pension) Plan**. Unlike a 401(k) (Defined Contribution) where the *input* is limited, here the *output* is defined. If you are older (45+), the IRS allows you to contribute massive amounts (e.g., $250k – $400k/year) to “fund” that future benefit.
- The Combo Power: You don’t have to choose. You can stack a Cash Balance Plan **ON TOP** of a 401(k) Profit Sharing Plan. This allows a business owner to shelter nearly **$350k – $450k annually** from current taxes.
The “Employee Tax” Friction
The Catch: To pass IRS non-discrimination testing, you generally must contribute to your employees’ retirement accounts too (usually 5% to 7.5% of their salary).
👉 The Math: If you contribute $300k for yourself and spend $30k on employees, the tax savings on the $300k (approx. $150k in tax saved) strictly outweighs the $30k cost. It’s an arbitrage.
Mechanic: The Age-Based Advantage
Simulation: 55-Year-Old Surgeon / Consultant ($800k Income)
| Feature | SEP IRA / 401(k) | Cash Balance Plan |
|---|---|---|
| Contribution Limit | ~$69,000 (Fixed) | $200k – $400k (Age Dependent) |
| Flexibility | Discretionary (Can skip years) | Mandatory (Must fund annually)* |
| Complexity | DIY / Low Cost | Actuary Required ($2-5k fees) |
*Note: Plans typically run for 3-5 years minimum. You can amend or freeze them if business income drops, but it requires administrative work.
“If you are making over $500k and only using a 401(k), you are voluntarily overpaying taxes. A Cash Balance Plan is the most aggressive legal tax shelter available to high-income business owners today.”