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Aug 12, 2025

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Cash Balance Plans: Guide for Pension and Retirement Strategy

Running a successful business comes with many rewards, but it also comes with challenges such as 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 retirement strategy you didn’t know you needed.

Overview

Cash balance plans let high earners contribute far more than a 401(k), often $100k–$300k+ per year.
Contributions are fully tax-deductible, making these plans one of the strongest tools for reducing taxable income.
Employers must commit to annual funding and higher administrative costs due to required actuarial oversight.
At retirement, you can take the balance as a lump sum (often rolled to an IRA) or convert it into a lifetime annuity.

Table of Contents

What is a Cash Balance Plan?

A Cash Balance Plan is a type of employer-sponsored retirement plan that blends the strengths of two familiar systems:

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.

How Cash Balance Plans Work:

Every year, the employer contributes to a hypothetical account in your name. This account grows through two key features:

Employer Contributions: A set percentage of your salary (or a flat dollar amount) that your employer contributes each year.
Interest Credits: A guaranteed rate of return, either fixed or tied to an index (like Treasury yields).
Unlike a 401(k), the employer, not the employee, bears the investment risk.

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.

What Is the Difference Between a Pension and a Cash Balance Plan?

A traditional pension promises a monthly income for life, calculated using formulas based on salary and years of service. You never see an account balance, only the future income amount.

A Cash Balance Plan, on the other hand, is still legally a pension, but your benefit is expressed as a hypothetical account balance that grows each year with pay credits and interest credits. At retirement, you can take this balance as a lump sum (often rolled into an IRA) or as an annuity. In short:

Pension = guaranteed monthly income.
Cash Balance Plan = guaranteed account balance + optional monthly income.

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.

If you have any questions about cash balance plans, reach out to us

How Does a Cash Balance Plan Compare to Others?

Let’s take a quick look at how Cash Balance Plans compare to other common retirement options for 2025:

Cash Balance Plan

Contribution Limits:

Typically $100,000–$300,000+ annually depending on age, income, and actuarial calculations.
Older owners (50s and 60s) can contribute significantly more, often exceeding $300k.

Employer Tax Deduction:

Fully deductible, with no fixed IRS dollar cap.
Large deductions make it ideal for high-earning business owners seeking aggressive tax reduction.

Employer Obligations:

Annual funding is required and must follow actuarial rules.
Contributions must remain consistent year to year (within an acceptable range).
Employers bear investment risk because it’s a pension plan.

Who is Cash Balance Plan Best For?:

High earners (physicians, attorneys, consultants, owners)
Older business owners wanting to “catch up” fast
Firms wanting major tax deductions

Solo 401(k)

Contribution Limits:

Up to $70,000 (2024) when combining employee deferral + employer profit sharing.
Requires self-employment with no full-time employees other than a spouse.

Employer Tax Deduction:

Up to $46,500 in employer contributions.
Employee deferrals reduce taxable income separately.

Employer Obligations:

Optional contributions and no required annual funding.
Flexibility to contribute more in profitable years and less in slow years.

Who is a Solo 401(K) Best For?:

Solo business owners
Those wanting flexibility without mandatory annual contributions
Individuals looking for tax savings at a moderate level

SEP IRA

Contribution Limits:

Up to $70,000 (2024), based on 25% of net earnings.
Simple to administer but contributions must be proportional for all eligible employees.

Employer Tax Deduction:

Fully deductible to the business.

Employer Obligations:

Optional contributions each year.
No requirement to contribute annually.

Who is SEP IRA Best For?:

Small businesses without full-time employees
Owners seeking simplicity and low cost
Businesses without the desire for high annual contributions

The type of retirement plan you choose depends on your financial abilities and long term goals. Cash Balance Plans allow for significantly higher contributions and greater tax savings but require a stronger financial commitment and higher setup costs.

Tax Advantages of Cash Balance Plans

Cash balance plans provide some of the highest tax benefits available to business owners. Employers can make large, fully deductible contributions each year, often exceeding $100,000 depending on age and income. These deductions reduce taxable income for the business and can help some owners qualify for the Qualified Business Income (QBI) deduction. Plan assets also grow tax-deferred, and participants can roll their balance into an IRA at retirement to continue tax-advantaged growth.

What Are the Risks of a Cash Balance Plan?

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

1️Assess 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.

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.

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 to take action and explore this powerful strategy further. Learn how our Private Wealth team supports high-income individuals with advanced tax strategy, retirement planning, and long-term wealth building.

Talk to a CPA today at Gelt

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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.

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