August 12, 2025
Cash Balance Plans: Take Your Retirement Savings Beyond The Limits
Running a successful business comes with many rewards, but it also comes with challenges — like figuring out how to reduce taxes and save enough for retirement. If you’re a high-income business owner, a Cash Balance Plan might be the financial strategy you didn’t know you needed.
What we’ll cover:
- What is a Cash Balance Plan?
- Why Consider a Cash Balance Plan?
- Who Benefits Most From a Cash Balance Plan?
- How Does a Cash Balance Plan Compare
- What Are the Risks?
- How to Set Up a Cash Balance Plan
🌱 What is a Cash Balance Plan?
A Cash Balance Plan is a type of retirement plan that combines the best of two worlds:
- The security of traditional pension plans (where you’re promised a specific amount during retirement).
- The flexibility of common retirement accounts like 401(k)s and IRAs, where you can see your account balance and understand what you’re saving.
Here’s how it works:
Under a Cash Balance Plan, eligible employees have an account that grows every year in two ways:
- Employer Contributions: A percentage of earned income or a fixed amount
- Interest Credits: Annual returns are guaranteed, often tied to a fixed rate.
At retirement, you can take your balance as a lump sum or monthly payments. Think of it like a pension plan where you can see your balance grow over time.
🌳 Why Consider a Cash Balance Plan?
Here’s why high-income business owners love Cash Balance Plans:
✔️ High Contribution Limits
Unlike common retirement plans, where total contributions per employee are limited to $70,000 in 2025, Cash Balance Plans allow you to contribute significantly more. Depending on your age and income, you could save upwards of $100,000 per year for retirement.
✔️ Major Tax Savings
As an employer, every dollar contributed to a Cash Balance Plan is tax-deductible, which can substantially lower your taxable income. For high-income earners, this can mean five-figure tax savings annually.
✔️ Rapid Retirement Growth
If you’ve started saving for retirement later in life, a Cash Balance Plan can help you catch up quickly. Higher contribution limits allow you to build robust savings faster than traditional retirement plans.
🌟 Who Benefits Most From a Cash Balance Plan?
Cash balance plans aren’t for everyone. They work best for:
- High-Income Business Owners: Particularly those comfortable paying themselves $250,000 or more in salary.
- Stable Businesses: Companies will need consistent cash flow, as the plan requires annual contributions.
- Small Business Owners with Few or No Employees: Owners of S corporations, and partnerships with limited teams or high turnover will benefit the most.
- Professionals over 40: Cash Balance Plans can help mid and late-career professionals quickly make up lost time saving for retirement.
⚖️ How Does a Cash Balance Plan Compare
Let’s take a quick look at how Cash Balance Plans compare to other common retirement options for 2025:
Cash Balance Plan
- Contribution Limits: $100,000+ (depending on age).
- Employer Tax Deduction: Fully deductible.
- Employer Obligations: Annual funding required.
- Administrative Costs: High.
Solo 401(k)
- Contribution Limits: $70,000.
- Employer Tax Deduction: $46,500.
- Employer Obligations: Optional.
- Administrative Costs: Medium.
SEP IRA
- Contribution Limits: $70,000.
- Employer Tax Deduction: Fully deductible.
- Employer Obligations: Optional.
- Administrative Costs: Low.
Key Takeaway: Cash Balance Plans allow for significantly higher contributions and greater tax savings but require a stronger financial commitment and higher setup costs.
⚠️ What Are the Risks?
No financial strategy is without trade-offs. Here are the potential downsides of a Cash Balance Plan:
➖ Required Annual Contributions
Unlike a 401(k), contributions to a Cash Balance Plan aren’t optional. You’ll need to fund it each year, so it’s important to ensure your business has consistent cash flow.
➖ Higher Administrative Costs
These plans are more complex to manage and require actuarial services to calculate contributions and ensure compliance with IRS rules.
➖ Employee Costs
If you have employees, you’re required to include them in the plan and make contributions on their behalf. This can increase the overall cost of the plan, and impact the overall tax efficiency of this strategy.
🛠️ How to Set Up a Cash Balance Plan
1️⃣ Assess Your Goals
Start by identifying your retirement and tax-saving goals.
- How much do you want to save?
- What’s your timeline for retirement?
Work with a financial advisor or pension specialist to evaluate whether a Cash Balance Plan aligns with your financial situation, and create a plan that’s tailored to your needs.
2️⃣ Set Up and Fund The Plan
After designing the plan, establish the account through a financial institution and begin making required contributions.
You’ll have until the tax filing deadline to fund your plan each year, so an added benefit in the year you set up the plan is that you can enjoy the tax benefit of the contributions in year 1, and fund the account in year 2.
3️⃣ Maintain the Plan
Ensure ongoing compliance by filing annual reports, conducting actuarial valuations, and reviewing your plan’s performance. You’ll need a third-party-administrator (TPA) to help you manage the heavy lifting.
Example: How a Cash Balance Plan Works in Real Life
👋 Meet Karen, a 50-Year-Old Consultant
- Karen owns an S corporation and earns $400,000 annually.
- She’s already maxed out her 401(k) contributions but wants to save more for retirement and lower her tax bill.
Here’s how a Cash Balance Plan helps:
- Annual Contribution: $120,000
- Tax Savings: $44,400 (assuming a 37% tax rate)
- 10-Year Total Retirement Savings: Over $1.2 million, tax-deferred.
💭 Final thoughts: Is a Cash Balance Plan Right for You?
A Cash Balance Plan can be a game-changer, but it’s not for everyone. Ask yourself:
- Do I have consistent cash flow to fund the plan annually?
- Am I looking for significant tax savings?
- Am I close to retirement and need to save aggressively?
- Do I have the resources to manage the administrative requirements?
If you answered “yes” to these questions, it’s time take action and explore this powerful strategy further.
---
ℹ️ This information is for educational purposes only and does not constitute legal or investment advice. Consult a qualified professional before making any investment decisions.
References
