The Cash Balance Plan: How High Earners Can Shield $300k+ Annually from Taxes
The Cash Balance Plan: How High Earners Can Shield $300k+ Annually from Taxes
COACHING POINTS
- The Limit Breaker: While 401(k) plans are capped at ~$69,000 (2025), Cash Balance Plans allow for contributions exceeding $300,000 per year, depending on your age and income. It is the only way to compress 20 years of saving into 5 years.
- The Tax Arbitrage: Every dollar contributed reduces your taxable income dollar-for-dollar. For a high earner in the 37% bracket + state tax, a $300k contribution creates an immediate tax savings of ~$120,000+.
- The Asset Protection: Like other ERISA-qualified plans, assets in a Cash Balance Plan are generally protected from creditors and lawsuits, adding a layer of legal safety to the tax benefits.
If you are a successful business owner or partner earning over $500k, the 401(k) limit is a nuisance. You are likely paying more in taxes than you are saving for retirement. The Cash Balance Plan fixes this. It is a “Defined Benefit” plan that looks and feels like a 401(k) but has the contribution limits of a corporate pension.
Defined Benefit limits are based on providing a specific payout at retirement. The closer you are to retirement, the more you can put in.
- Annual Benefit Limit: $275,000 (Max annuity payout at age 62). Authority: IRS COLA Limits 2025
- Lump Sum Max: ~$3.5 Million (The pot needed to fund that annuity).
- Example (Age 60): To reach that $3.5M pot by age 62, you might need to contribute $300,000+ per year. This entire amount is tax-deductible.
What-If Scenario: 55-Year-Old Doctor ($800k Income)
Goal: Maximize Tax Deferral. Tax Rate: 40% (Fed + State).
| Strategy | Total Contribution | Tax Savings (@40%) | Take-Home Impact |
|---|---|---|---|
| 401(k) + Profit Sharing | $76,500 (Max) | $30,600 | Baseline |
| + Cash Balance Plan | $76,500 + $223,500 | $120,000 | Cost is offset by tax savings |
Visualizing the Acceleration
*Figure 1: Account Growth. The Green line (With Cash Balance) accelerates rapidly due to the massive annual infusion of pre-tax capital.*
Execution Protocol
You cannot open this at Fidelity with a click. It requires a Third-Party Administrator (TPA) and an Actuary to calculate your specific limits annually based on age and income. Authority: IRS Pub 560
This strategy is most efficient for Solopreneurs or partnerships with few employees. If you have many staff, you must contribute to them too (typically 5-7.5% of their salary) to pass non-discrimination testing.
This is a “Pension” plan. You must intend to keep it open for at least a few years. It is not a one-year tax hack. However, you can freeze or terminate it later if business profits decline.
COACHING DIRECTIVE
- Do This: If you are over 45, self-employed (or partner), earn >$400k, and want to catch up on retirement savings aggressively.
- Avoid This: If your income fluctuates wildly. The contribution is mandatory. A bad year could force you to terminate the plan early, inviting IRS scrutiny.
Frequently Asked Questions
What is a Cash Balance Plan?
It is a type of ‘Defined Benefit’ pension plan that acts like a ‘Defined Contribution’ plan (401k). The employer credits a participant’s account with a set percentage of their yearly compensation plus a fixed interest rate credit.
Who is the ideal candidate?
High-income business owners, partners in professional firms (doctors, lawyers), or independent contractors aged 45+ who consistently earn enough to max out a 401(k) and still have excess cash flow.
Are the contributions mandatory?
Yes. Unlike a 401(k) where you can change contributions at will, a Cash Balance Plan requires a consistent annual funding commitment. However, the plan can be amended or frozen if business conditions change drastically.