If you’re a high earner making mid to high six figures, the standard contribution limits of a 401k or Solo 401k may feel restrictive. You might be looking for ways to lower taxable income while setting aside more for retirement. A cash balance plan could be the answer.

This type of plan is different from the typical 401k. Instead of fixed annual contribution caps, it works as a defined benefit plan. That means contributions are designed around a target retirement balance, which can reach up to $3.5 million in 2025. Contributions often range from $100,000 to $300,000 depending on age and income.

In the sections ahead, we’ll explain how a cash balance plan works, its key features, and who may benefit from setting one up.

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Table of contents

Understanding Cash Balance Plans

A cash balance plan is not as widely known as a 401k. Because it blends features of both a defined benefit plan and a defined contribution plan, it may seem complex at first. Below is a breakdown of its key characteristics, features, investment rules, and who might benefit.

Key Characteristics

✅ A cash balance plan is a defined benefit plan, similar to a pension. It specifies how much you could receive at retirement.
✅ Traditional pensions usually pay a monthly benefit for life. Cash balance plans can do this too, but most participants prefer a lump sum payment.
✅ Lump sums are often rolled over tax-free into another retirement account, such as an IRA or 401k.
✅ The usual retirement age for withdrawals is between age 62 and 65.

Main Features

✅ No fixed annual contribution limits. Contributions depend on age and compensation.
✅ Older participants may contribute more each year to reach the plan’s target balance.
✅ Typical contributions for business owners range between $100,000 and $300,000 annually.
✅ For 2025, the IRS maximum defined benefit is $280,000 per year (IRC Section 415(b)). Converted into a lump sum using IRS rules, this equals about $3.5 million as the lifetime cap.
✅ A cash balance plan may be paired with a 401k or Solo 401k to further increase retirement savings.

📝 Note: The actual income needed to reach these limits can vary depending on net income, adjusted income, and business type.

How Investments Work

✅ In a 401k, participants manage their own account and choose investments.
✅ In a cash balance plan, investments are held in a pooled fund managed by trustees and advisors.
✅ Participants receive an interest crediting rate, either:

  • A fixed rate (often around 5%), or
  • A variable rate linked to an index, such as the one-year Treasury bill.

The employer bears the investment risk. Employees receive the promised fixed or variable rate whether the plan gains or loses value.

Who Might Benefit

✅ Businesses with zero to ten employees. The plan is easier and less costly to manage with fewer staff.
✅ Business owners earning $200,000 or more. For corporations, this means W-2 wages. For sole proprietors or partnerships, this refers to net self-employment income after deductions.
✅ Those who want to contribute more than the 2025 limits of a 401k, Solo 401k, or SEP IRA ($70,000 under age 50, $77,500 at age 50+).
✅ Businesses with stable cash flow, capable of contributing at least $100,000 annually for 5 or more years.
✅ Employers willing to make mandatory contributions of 5% to 7% of employee pay for eligible staff.

📝 Note: Employer contributions are required for all eligible employees, not just the owner.

What Is a Cash Balance Plan?

A cash balance plan is a type of defined benefit plan. It targets a promised benefit at retirement, usually between age 62 and age 65. Instead of setting a fixed employee contribution limit each year, the plan works backward from the promised benefit. Your age and compensation guide how much you could contribute each year to stay on track.

How It Works Day to Day

✅ The plan records pay credits and interest credits to a hypothetical account.

✅ The interest credit may be a fixed rate or a rate tied to an index like the one year Treasury.

✅ The employer is responsible for funding the promised benefit and for investment results.

✅ At retirement or separation, participants often choose a lump sum that may be rolled to an IRA or 401k, or they can elect an annuity.

📝 Note: Actual annual funding ranges must be certified by an actuary and depend on age, compensation, and service history. Investment results may affect required employer funding.

Cash Balance Plan vs Traditional Pension

✅ Both are defined benefit plans.

✅ Traditional pensions typically pay a monthly amount for life.

✅ Cash balance plans also permit a monthly annuity, yet many participants select a lump sum that may be rolled into another tax deferred plan.

Cash Balance Plan vs 401k

✅ A 401k is a defined contribution plan with fixed annual employee contribution limits.

✅ In a 401k, participants direct their own investments and bear market risk.

✅ In a cash balance plan, assets sit in a pooled fund. The employer bears investment risk, and participants receive the plan’s interest credit regardless of market moves.

✅ Contribution amounts for a cash balance plan are influenced by age, compensation, plan funding status, and actuarial assumptions.

✏️ Hypothetical Example:

A 52-year-old owner earns $350,000 in W-2 wages. An actuary targets a benefit payable at age 62. Based on age and compensation, the calculated annual funding could fall near $180,000 for the current year, separate from any 401k employee contributions. Actual numbers vary by plan design and assumptions.

📝 Note: Income terms differ by business type. For corporations, compensation generally refers to W-2 wages. For sole proprietors and partnerships, it often refers to net self employment income after applicable deductions.

Best Candidates for a Cash Balance Plan

A cash balance plan is not the right fit for every business. These plans work best for owners who want to make very large retirement contributions and have the financial stability to support them. Since contributions are required annually, the business must be in a strong and consistent position to maintain funding.

Ideal candidates often include:

✅ Businesses with few employees – Since eligible employees must be included, companies with smaller teams usually find these plans easier to manage.

✅ Stable and predictable revenue – Contributions are mandatory each year, so a steady income stream is important.

✅ Owners earning $200,000+ annually – High compensation allows for much larger contributions that make the plan worthwhile.

  • For incorporated businesses, this means W-2 wages.
  • For unincorporated businesses, this refers to net earned income from self-employment (after reducing self-employment tax).

✅ Owners looking for tax savings – One of the biggest advantages is the ability to lower taxable income significantly through large pre-tax contributions.

📝 Note: Cash balance plans usually make the most sense for professionals such as doctors, lawyers, consultants, and successful small business owners who have already maxed out their 401k or Solo 401k and want to save more on a tax-deferred basis.

✏️ Hypothetical Example:

A business owner earns $300,000 per year and has only two employees. After maxing out a Solo 401k, they still want to set aside more pre-tax income. With a cash balance plan, they could contribute an additional $150,000 annually, significantly reducing taxable income while building retirement wealth.

What Business Structures Can Set Up a Cash Balance Plan?

Cash balance plans are flexible when it comes to business structure. Almost any type of business entity can adopt one, as long as the owner has steady income and the ability to make ongoing contributions.

Common structures that use cash balance plans include:

  • Sole proprietorships – Independent business owners can open a plan in their own name.
  • Partnerships and LLCs – Multiple owners can participate, with contributions based on each partner’s or member’s earnings.
  • S corporations – Contributions are tied to W-2 wages received by the owner.
  • C corporations – Owners and executives often use these plans to supplement existing retirement benefits.

The choice of structure doesn’t limit your ability to set up a plan. What matters more is your compensation, income stability, and long-term retirement goals.

Why Consider Setting Up a Cash Balance Plan?

For high-earning business owners, a cash balance plan can be a powerful retirement and tax-saving tool. It allows you to contribute far more than traditional retirement plans like a 401k or Solo 401k.

Typical contributions range from $100,000 to $300,000 per year, depending on your age and income. If you fall into the 37% tax bracket, that could translate into $37,000 to $110,000 in federal tax savings in just one year. Those contributions also grow tax-deferred until retirement, giving you even more long-term value.

Like any strategy, cash balance plans come with both advantages and trade-offs. Let’s break them down clearly.

Key Benefits of a Cash Balance Plan

✅ Higher contribution potential – You can contribute well above what a 401k allows, often between $100,000 and $300,000 each year.

✅ Can be paired with a 401k or Solo 401k – Combining plans boosts your total annual retirement contributions.

✅ Catch-up opportunities for older owners – As you get closer to retirement age, your allowable contributions increase.

✅ Lump sum option at retirement – You can take a lump sum and roll it into an IRA or 401k without triggering taxes.

✅ Flexible contribution range – Plans typically give you a contribution range, so you have some control each year.

✅ Attractive to employees – Employer contributions in cash balance plans are usually higher than in standard 401k plans, which can feel like a bonus.

Potential Drawbacks to Consider

❌ Higher administrative costs – These plans require actuarial services and more complex filings.

❌ Long-term commitment – Plans are meant to be ongoing. You should expect to keep the plan open for at least 3 years.

❌ More complexity – Compared to a 401k, a cash balance plan has more rules, moving parts, and reporting requirements.

❌ Mandatory contributions – Once the plan is in place, the business must make required contributions each year.

📝 Note: A cash balance plan can be incredibly valuable if you have consistent income and want to reduce your taxable income while building significant retirement savings. But it is important to understand the responsibilities that come with it. A financial advisor or plan administrator can help you decide if it fits your goals and capacity.

Tax Benefits of a Cash Balance Plan

A cash balance plan can provide substantial tax savings for business owners. Contributions reduce taxable income, potentially lowering both federal and state taxes. How much you save depends on your income, business structure, and where you live.

How Contributions Affect Taxes

  • Corporate taxes – Contributions are a deduction against business income, reducing the company’s taxable profit.
  • Personal federal taxes – For S corporations, partnerships, or sole proprietors, contributions can reduce profits reported on a Schedule K-1.
  • State and local taxes – If your state imposes income taxes (ranging from 0% to 12.3%), contributions may lower these taxes as well.

Impact on Qualified Business Income (QBI) Deduction

Contributions can help business owners stay below QBI income limits, allowing them to qualify for the deduction.

  • For 2025, the QBI deduction thresholds are $197,300 for single filers and $394,600 for joint filers in specified service trades (like doctors, attorneys, consultants, CPAs).
  • By making contributions to a cash balance plan, owners may reduce taxable income enough to claim or preserve the QBI deduction.

✏️ Hypothetical Example:

A 45-year-old business owner earns $350,000. By contributing $150,000 to a cash balance plan, federal taxable income could drop by that amount. If the owner is in the 37% federal bracket, that could mean $55,500 in federal tax savings, in addition to potential state tax reductions.

Tax benefits depend on your filing status, business type, and income. Consulting a tax professional is generally recommended before implementing a cash balance plan.

Contribution Limits and Deadlines

Cash balance plans differ from defined contribution plans like a 401k because there is no fixed annual contribution limit. Instead, contributions are calculated to reach a specific retirement benefit, which depends on your age, compensation, and years until retirement. An actuary typically determines the exact contribution each year.

Key Contribution Limits

✅ Payout Limit – If you choose annuity payments, the IRS limits the annual payout. For 2025, it is the lesser of $280,000 or 100% of the participant’s high-3-year average compensation.

✅ Lifetime Balance Limit – The maximum account balance is roughly $3.5 million in 2025, indexed annually for inflation. This total includes both contributions (principal) and interest (fixed interest credits).

✅ Age and Compensation Adjustments – Older participants or those with higher compensation can contribute more annually to reach the targeted retirement benefit.

✅ Typical Contribution Range – Most business owners contribute between $100,000 and $300,000 per year, depending on age, income, and plan design.

Contribution Deadlines

  • Contributions must be made by the business’s tax filing deadline, including extensions. Example: A sole proprietorship filing by the federal deadline has until April 15th, or October 15th with an extension.
  • Contributions for corporations or partnerships follow the same rule, adjusted to the entity’s filing deadline.

📝 Note: Because contribution amounts can be high and vary yearly, it is generally recommended to work with a plan actuary or retirement professional to ensure contributions are calculated correctly and deadlines are met.

Combining a Cash Balance Plan with a 401k or Solo 401k

Many business owners who adopt a cash balance plan choose to pair it with an existing 401k or Solo 401k. This combination can increase the total amount you can contribute toward retirement each year.

How the Combo Works

✅ Higher total contributions – In addition to employer contributions to a cash balance plan, business owners can make employee contributions to a 401k or Solo 401k of up to $23,500 in 2025 (or $31,000 if age 50+).

✅ Enhanced retirement savings – Combining plans allows owners to save significantly more than with a single plan alone, especially helpful for those catching up on retirement later in their career.

Important Consideration

❌ Reduced employer contribution percentage – Employer contributions to the 401k or Solo 401k are lowered from the typical 25% of compensation (~20% for self-employed) to around 6% of compensation when paired with a cash balance plan.

📝 Note: Despite the reduction in employer contribution percentage to the 401k, the overall contribution potential is often higher because the cash balance plan allows for large pre-tax contributions that supplement retirement savings.

Managing Employees in a Cash Balance Plan

Cash balance plans are generally best suited for self-employed individuals or small businesses with relatively few employees. This is due to the requirements for employee participation and mandatory contributions.

Employee Eligibility

Employers may exclude employees who do not meet all of the following criteria:

✅ At least 21 years old
✅ Worked for the company for at least one year
✅ Worked 1,000 hours or more during the calendar year

Participation does not need to be offered to every eligible employee. However, the employer must provide a meaningful benefit to the lesser of:

  • 40% of eligible employees, or
  • 50 participants

📝 Note: Some business owners choose to offer a cash balance plan alongside a 401k plan to meet nondiscrimination testing requirements.

How Employee Contributions Work

  • Employees are promised a specific account balance by a certain age, typically between 62 and 65.
  • Accounts grow each year through:
    ✅ Pay credits – A percentage of the employee’s compensation
    ✅ Interest credits – Either a fixed rate or a variable rate tied to an index such as the one-year Treasury bill rate
  • At retirement, employees can choose a lump sum payout or monthly annuity payments.

📝 Note: The contribution calculations are complex and typically require an actuary.

If a Participating Employee Leaves

  • Cash balance plan balances can generally move with the employee.
  • Funds may be rolled over into an IRA or a 401k plan at a new employer.

How Investments Work in a Cash Balance Plan

Investing in a cash balance plan works differently than in a 401k.

Pooled Investments

  • In a 401k plan, each participant manages their own account and selects investments individually.
  • In a cash balance plan, all assets are held in a pooled trust under the plan’s name.
  • Each participant has a share of the plan’s total assets, but investment decisions are managed by the plan’s trustees and actuaries.

Employer Investment Responsibility

✅ The employer bears the investment risk – they must pay out the promised interest credit regardless of investment performance.
✅ Cash balance plans are usually invested conservatively to avoid high volatility.

Impact on Contributions

  • If the plan underperforms the assumed interest rate, the employer may need to contribute more to cover promised benefits.
  • If the plan outperforms the assumed rate, required contributions may be lower for that year.

Unlike 401k plans where employees carry the investment risk, cash balance plan participants are guaranteed the interest credit regardless of gains or losses in the pooled investments.

Costs of Running a Cash Balance Plan

Cash balance plans involve both startup and ongoing costs, which vary depending on the size of the plan and the number of participants.

Typical Costs

✅ Startup costs: Approximately $2,000 to $3,000
✅ Ongoing annual costs: Around $3,000 for plans with four to five participants

❌ Additional employee costs: If you have employees, contributions to their accounts increase the total cost.

Potential Benefits

For businesses where a cash balance plan is suitable, a few thousand dollars in annual costs may result in tax savings of tens of thousands of dollars, sometimes approaching $100,000 depending on income and contributions.

Important Considerations

Before setting up a cash balance plan, it’s important to run a cost-benefit analysis:

✅ How much can the business owner contribute based on age and compensation?
✅ How much could this reduce federal and state taxes?
✅ What are the additional contributions required for employees?
✅ What are the fees for plan administration?

How Long to Maintain a Cash Balance Plan

Cash balance plans are designed to be long-term, or perpetual, retirement plans. It is generally recommended to keep the plan in place for at least three years to make the setup and administration costs worthwhile.

📝 Note: Exiting a plan too early may reduce potential tax benefits and could complicate compliance with IRS rules.

Wrapping It Up

A cash balance plan may be worth considering for business owners looking to increase retirement contributions beyond the limits of a 401k or Solo 401k. It offers the potential for significant tax savings and the flexibility of receiving benefits as a lump sum or annuity. Contributions are influenced by age, compensation, and plan design, and the employer bears the investment risk while employees are guaranteed interest credits.

Before setting up a plan, it may be helpful to consult a qualified actuary or financial professional to assess costs, contributions, and potential tax benefits. For businesses with employees, evaluating eligibility and contribution requirements is also important.

Next Steps: Consider combining a cash balance plan with a 401k or Solo 401k to further increase retirement contributions and explore related retirement planning strategies.

📌 Want to learn more about retirement plan options and strategies? Check out our other related articles for additional insights:

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The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

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