Cash Balance Plan: The “Super-Sized” 401(k) for High Earners
Tax Tips / Retirement
Cash Balance Plan: The “Super-Sized” 401(k) for High Earners
💡 Executive Summary
- Problem: As a high-income business owner (e.g., Doctor, Lawyer, Consultant), the $69k annual limit of a 401(k) is too small to make a dent in your tax bill.
- Solution: Layer a Cash Balance Plan (Defined Benefit) on top of your 401(k). It acts like a pension plan but functions like an investment account.
- Result: You can potentially contribute $300k – $400k per year (age-dependent) entirely pre-tax, reducing your taxable income massively.
⚠️ THE “GATEKEEPER” COST
To get the huge deduction for yourself, you must contribute to your employees (usually 5-7.5% of their salary). If you have many employees, the math might not work. This strategy is best for Owner-Only or Small Staff businesses.
To get the huge deduction for yourself, you must contribute to your employees (usually 5-7.5% of their salary). If you have many employees, the math might not work. This strategy is best for Owner-Only or Small Staff businesses.
If the 401(k) is a sedan, the Cash Balance Plan is a semi-truck. It is designed to haul massive amounts of cash into a tax-deferred shelter. For an owner aged 55+, the combined deduction limit often exceeds $350,000 annually. That is ~$130,000 in federal tax savings per year.
🧐 Core Mechanic: Actuarial Science
Unlike a 401(k) where the limit is fixed ($23k + match), a Cash Balance limit is based on your age. The older you are (closer to retirement), the more the IRS allows you to “catch up.” This is why it is the ultimate tool for late-career wealth accumulation.
Unlike a 401(k) where the limit is fixed ($23k + match), a Cash Balance limit is based on your age. The older you are (closer to retirement), the more the IRS allows you to “catch up.” This is why it is the ultimate tool for late-career wealth accumulation.
Performance Simulation
Max Tax Deduction (Age 55 Business Owner)
Standard 401(k) + Profit Sharing
~$76,500 Limit
Retail Limit
Combo (401k + Cash Balance)
~$360,000 Limit*
Institutional Power
Comparison: 401(k) vs. Cash Balance
| Feature | 401(k) Profit Sharing | Cash Balance Plan |
|---|---|---|
| Plan Type | Defined Contribution (DC) | Defined Benefit (DB) |
| Contribution Limit | ~$76.5k (Fixed Max) | ~$300k+ (Age Based) |
| Commitment | Discretionary (Can skip) | Mandatory (Must fund) |
“You are not just saving for retirement; you are aggressively defunding your current tax liability to compound wealth in a protected environment.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Alternative: CLAT (If you don’t have employees or want charity) ⚖️ The Exit: QSBS (Tax-free sale instead of tax-deferred income) ✅ The Retail Version: Backdoor Roth (For those with lower limits)🏛️ Institutional Resources (External)
📘 US Dept of Labor: Cash Balance Plans Explained 🏛️ IRS Official: Pension Plan Guides 📜 Definition: Investopedia on Cash Balance
BMT designs for tax reality, not theory.