If you’re a business owner or high-income professional, you may have already hit the contribution limits on your 401(k), SEP, or SIMPLE IRA. That can be frustrating, especially if you’re in your peak earning years or trying to catch up on retirement savings.
A cash balance plan offers another path. These plans allow for significantly higher tax-deferred contributions, but they also come with more structure and complexity.
How a Cash Balance Plan Works
A cash balance plan is a type of defined benefit plan. Unlike a 401(k), where the employee bears investment risk, a defined benefit plan promises a specific retirement benefit, and it’s the employer’s job to make sure there’s enough money to pay it—regardless of investment performance.
Each participant’s account is credited annually with:
- A pay credit (usually a flat dollar amount or percentage of pay), and
- an interest credit (either a fixed rate or tied to something like the 30-year Treasury yield).
The interest credit isn’t an actual investment return, it’s a guaranteed growth rate. If the plan’s investments fall short, the employer must make up the difference. If returns exceed the crediting rate, the surplus stays in the plan as a cushion for future funding.
This setup offers employees a steady, predictable benefit, especially attractive during volatile markets.
Accessing the Money
Most plans define retirement age as 62 to 65, though early retirement options may be available. Like other qualified plans, early withdrawals before age 59½ may be subject to penalties unless an exception applies.
When you leave the company or retire, you’ll generally choose between:
- A lump sum rollover to an IRA, or
- a lifetime annuity (single or joint with a spouse).
Lump sums preserve tax deferral and give you full control of the funds. If you go the annuity route, it provides steady income but may limit what’s left for heirs—unless the plan includes a “period certain” or refund option.
Contribution Limits (and Why They Matter)
This is where cash balance plans really shine.
While 401(k) plans cap total contributions at $70,000 in 2025 (or $77,500 with catch-up), a cash balance plan can allow for significantly more, especially for older participants. That’s because contributions are based on what’s needed to fund a maximum future retirement benefit.
For 2025, that maximum benefit is $280,000 per year starting at age 62. The closer you are to retirement, the more you may be allowed to contribute annually to hit that target.
Each year, an actuary calculates what needs to be contributed based on your age, income, and other plan assumptions. If you’re in your 50s or 60s, the allowable amount can be quite large.
Keep in mind:
- Only the first $350,000 of compensation can be used in calculations (2025 limit).
- Employer contributions are deductible. For pass-through entities, this can reduce owners’ taxable income without needing to show up as wages.
Pairing with a 401(k) Plan
Many high-income earners combine a cash balance plan with a 401(k). The 401(k) allows for elective deferrals and employer contributions. The cash balance plan sits on top of that, creating a second tier of tax-deferred savings.
This combo is common in medical and law practices, or any closely held business where owners want to save aggressively while reducing current tax liability.
What’s the Catch?
Cash balance plans are more complex than 401(k)s and carry heavier responsibilities. They require:
- Annual actuarial valuations and compliance testing.
- Funding guarantees—if returns fall short, the employer must contribute more.
- PBGC insurance in most cases, unless it’s a professional firm with 25 or fewer participants.
- Adherence to nondiscrimination rules, which can increase costs if you have employees.
These aren’t set-it-and-forget-it plans. They require ongoing oversight and should be managed with support from a qualified advisor and CPA.
Is a Cash Balance Plan Right for You?
These plans are a great fit for business owners who:
- Have consistent profits and cash flow.
- Are over 35 and want to accelerate retirement savings.
- Already max out their 401(k) or SEP-IRA.
- Have high incomes (especially in pass-through entities).
- Employ a small number of people where costs can be managed.
That said, they’re not right for everyone. You’ll want to consider your business goals, staffing, and cash flow before moving forward.
If you think a cash balance plan could be a fit, or if you’re just curious, it’s worth having a conversation. We can help you evaluate the pros and cons in the context of your business and long-term goals.
Disclosure: This content is for informational purposes only and not investment advice.
