Cash Balance Plans: How to Stuff $300k Into Retirement (The “Super 401k”)
Cash Balance Plans: How to Stuff $300k Into Retirement (The “Super 401k”)
EXECUTIVE SUMMARY
- The Limit: A standard 401(k) caps out at ~$69,000/year (2025). For a business owner earning $500k+, this is insufficient to significantly lower their tax bracket.
- The Solution: A Cash Balance Plan is a “hybrid” pension that sits on top of your 401(k). It allows you to contribute an additional $100k to $300k annually (depending on age), fully tax-deductible.
- The Candidate: This strategy is designed for High-Income Business Owners (Doctors, Lawyers, Consultants) who are older (40-50s) and want to aggressively catch up on retirement savings while slashing their current tax bill.
If the 401(k) is a sedan, the Cash Balance Plan is a Formula 1 car. It is the most powerful tax-deferral vehicle in the US Tax Code. Unlike a 401(k) (Defined Contribution), this is a Defined Benefit Plan. You are technically promising yourself a future pension benefit, and the IRS allows you to contribute massive actuarial amounts today to fund that promise. Source: IRS Publication 560 (Retirement Plans for Small Business)
Scenario: A 55-year-old Surgeon earning $600,000 (S-Corp).
- Barrel 1 (401k + Profit Sharing): Max out the standard limit.
Contribution: $76,500 (including catch-up). - Barrel 2 (Cash Balance Plan): Add the actuarial max.
Contribution: ~$225,000. - Total Deduction: $301,500.
Tax Savings (37% Fed + 5% State): You save roughly $126,000 in taxes this year.
Contribution Limits: 401(k) vs. Cash Balance
| Plan Type | Max Annual Deduction (Approx) |
|---|---|
| Solo 401(k) Only | 69000 |
| 401(k) + Cash Balance (Combo) | 300000 |
*The Cash Balance limit increases with age. The older you are, the more you can stuff in.
CRITICAL WARNING: The “Permanent” Commitment
This is not a flexible savings account.
| Feature | 401(k) | Cash Balance Plan |
|---|---|---|
| Flexibility Score (0-100) | 100 | 10 |
| Annual Admin Cost ($) | 200 | 2500 |
Execution Protocol
You cannot do this on TurboTax. You need a Third-Party Administrator (TPA) and an Actuary to calculate your specific limit based on your age and income. Setup usually costs $1k-$2k, and annual fees are ~$2k.
Unlike a 401(k), the assets in a Cash Balance Plan are technically “pooled.” The plan usually targets a fixed “Interest Crediting Rate” (e.g., 4%). If the investments earn 20%, the surplus reduces next year’s contribution limit. If they lose money, you must contribute more to make up the shortfall. Conservative investing is key.
When you retire or close the business, you terminate the plan. The entire balance (e.g., $2M) is then rolled over into a Traditional IRA. From there, it grows tax-deferred or can be Roth-converted using the Ladder strategy.
WEALTH STRATEGY DIRECTIVE
- Do This: Open a Cash Balance Plan if you are over 45, self-employed (or have a small practice), and consistently earn >$400k/year. It is the fastest way to catch up on retirement.
- Avoid This: Opening one if your income fluctuates wildly. If you have a bad year, you are still legally required to fund the pension, which can bankrupt your business.
Frequently Asked Questions
Can I do this with employees?
Yes, but it gets expensive. To pass “Non-Discrimination Testing,” you usually have to contribute 5-7% of your employees’ salaries to their accounts. This works best if you are the owner and have a few young employees (age disparity helps).
Is there a lifetime limit?
Yes. The total accumulation is capped at around $3.5M (adjusted for inflation). Once the pot gets that big, you can no longer contribute.
Deadline to open?
Under the SECURE Act 2.0, you can technically open it up until your tax filing deadline (including extensions), but it is safer to establish it by Dec 31 to ensure proper administration.