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Business Owners · Professionals · Practice Owners

Cash Balance & Defined Benefit plans — the highest-deduction retirement plan the IRS allows.

If you own a business or a professional practice, earn $500,000+ a year, and have already maxed out your 401(k) or SEP, there is an entire second tier of tax-deductible retirement savings waiting for you. A Cash Balance plan — a modern, simplified form of Defined Benefit pension — lets a single business owner deduct $100,000 to $350,000+ per year in pre-tax contributions, on top of a 401(k) and profit-sharing plan. The tradeoff is complexity: these plans require an actuary, annual funding, and a multi-year commitment. Done right, they compress ten years of retirement savings into one.

Max annual contribution
$350K+
Typical income fit
$500K+/yr
Stacks on top of
401(k) + PSP
Commitment
3–5 yrs
The Basics

What is a Cash Balance plan?

A Cash Balance plan is a type of Defined Benefit (DB) pension plan — the same category of plan that covers CalSTRS, CalPERS, and traditional corporate pensions — but engineered for modern small businesses and professional practices. Each participant has a hypothetical "account balance" that grows every year from two sources: an employer contribution (a percentage of pay or a flat dollar amount) and an interest credit (typically 4–5%, defined in the plan document). At retirement, the participant can take a lump sum — usually rolled directly to an IRA — or a lifetime annuity.

It looks like a 401(k)

Each person sees an account balance that grows every year. Easy to understand. Easy to communicate to staff.

It acts like a pension

Legally a defined benefit plan — so contribution limits are actuarially determined by age, compensation, and years to retirement, not by a flat 401(k) cap.

It's tax deductible

Employer contributions are fully deductible to the business in the year contributed. Growth inside the plan is tax-deferred.

Portable at exit

At retirement or plan termination, the account balance rolls directly to an IRA — no annuitization required.

How It Works

How the contribution limit is calculated

Unlike a 401(k), which has a flat annual cap, a Cash Balance plan's contribution limit is actuarially determined for each participant. The IRS lets you fund enough today to produce a target benefit at age 62 — currently capped at roughly $280,000/year of lifetime retirement income under IRC 415(b). Working backwards from that target, an actuary solves for the annual contribution that will fund it. The older you are and the closer to retirement, the bigger the allowed contribution — because there are fewer years of compounding to get you there.

The basic logic:

Target Benefit at Age 62 → Actuary Solves → Annual Contribution

The target benefit. IRC 415(b) caps the lifetime annuity benefit at approximately $280,000/year (2026 limit, indexed). The actuary works backwards from that number, using the plan's interest crediting rate and mortality assumptions.
Age matters. A 55-year-old owner funding to age 62 has 7 years of compounding. A 35-year-old has 27 years. Same target benefit, wildly different annual contributions.
Compensation matters. The 415(b) cap also can't exceed 100% of your highest 3-year average compensation — so a business owner earning $180,000 can't fund to the full $280,000 target.

Approximate maximum contributions by age (2026)

Age at StartApprox Max
35$85,000
40$115,000
45$155,000
50$215,000
55$285,000
60+$340,000+

Illustrative only. Actual limits depend on plan design, interest crediting rate, and your compensation history. Requires actuarial certification each year.

Stacking on top of 401(k) — 2026 limits

Plan LayerMax
401(k) deferral$24,500
Profit-sharing match$45,500
Age 50+ catch-up+$8,000
Age 60–63 super catch-up+$11,250
Cash Balance (age 55)+$285,000

A 55-year-old owner can legally defer $300K+ in a single year between 401(k), profit-sharing, and Cash Balance — all tax-deductible to the business.

Worked Example

What it looks like for a $700K solo business owner

A 55-year-old consultant earning $700,000 through an S-corp, no employees, has already funded the 401(k) and profit-sharing tier. Opens a Cash Balance plan for the 2026 tax year.

Tax Year 2026 — Stacked Retirement Contributions

Contribution LayerPurposeAmount
401(k) employee deferralPre-tax deferral from salary$24,500
Age 50+ catch-upOver-50 additional deferral$8,000
Profit-sharing contributionEmployer match / discretionary$45,500
Cash Balance contributionActuarially-determined DB funding$200,000
Total tax-deductible retirement contribution$278,000

Tax savings. At a combined federal+California marginal rate of roughly 47%, that $278K deduction is worth approximately $130,000 in cash tax savings in a single year. The business owner still controls the money — it's growing inside their own plan — but the IRS and the FTB no longer get their piece until retirement, when most business owners are in a meaningfully lower bracket.

Who's A Good Fit

Ideal candidates for a Cash Balance plan

Cash Balance plans are not for everyone. They require consistent cash flow, a multi-year commitment, and usually a census of employees that works out favorably. The candidates below typically benefit the most.

01

High-income professionals

Doctors, dentists, attorneys, consultants — earning well into six figures — who want to reduce taxable income today and rapidly grow retirement savings.

02

Entrepreneurs with stable cash flow

Owners of consistently profitable businesses who are looking for large, tax-deductible contributions beyond what a 401(k) allows.

03

Late starters to retirement saving

Business owners in their 40s, 50s, or 60s who need to catch up quickly and want to make large contributions each year. The older you start, the higher the allowable contribution.

04

Solo or near-solo owners

Independent consultants, solo practitioners, and small firms with no or few employees — so the owner captures most of the contribution economics.

05

Already maxing a 401(k) or SEP

Owners who have hit the contribution limit on their existing qualified plan and want a tax-efficient way to save more than a 401(k) alone will allow.

06

Professional services firms

Medical practices, law firms, engineering firms, accounting firms — especially those with partners or high earners who can fund at the top of the allowable limits.

07

Owners preparing for an exit

Business owners a few years from a sale or transition who want to reduce current-year taxes and build pre-tax retirement savings ahead of a liquidity event.

08

High-tax state residents

Owners in California, New York, New Jersey, and other high-tax states who want to leverage every possible federal and state deduction available.

09

Owners who want to retain key staff

Companies with a handful of key employees who want to use a qualified retirement plan as part of a broader compensation and retention strategy.

Pro vs Con

Cash Balance vs 401(k) vs SEP IRA

Entry Level

SEP IRA

$70,000

Simplest. One-person or small-staff businesses. 25% of compensation up to the 2026 cap. No actuary, no annual filings. Contribution is fully flexible year to year. Great starting point.

Mid Tier

401(k) + Profit Sharing

$78,000–$97K

Most popular. $24,500 employee deferral plus up to $45,500 profit-sharing. Catch-up adds another $8K at 50+, $11,250 super catch-up at 60–63. Annual 5500 filing required but straightforward.

Top Tier

Cash Balance + 401(k)

$300K–$400K+

Highest deduction available. Requires an actuary, an annual funding commitment, and a 3–5 year expected lifespan minimum. Best for owners earning $500K+ who want to compress a career of savings into a few years.

Busting The Myths

Seven common Cash Balance plan myths

Myth 1

"Cash Balance plans are too expensive and complicated to set up."

The truth

Setup and annual actuarial fees run $3–8K depending on headcount. For an owner deducting $200K+ a year, the net tax benefit is 15–20× the administrative cost. The complexity sits with the actuary, not you — you sign forms, fund the contribution, and get a benefit statement.

Myth 2

"I'm way too young."

The truth

Younger owners get smaller allowable contributions — but contributions still meaningfully exceed what a 401(k) alone allows. A 40-year-old earning $500K can typically add $110–130K/year on top of their 401(k) stack.

Myth 3

"I have too many employees."

The truth

Cash Balance plans can be designed with staff cost as low as 5–7.5% of non-owner payroll through cross-testing rules. For most small professional practices, that's a modest tradeoff versus the owner's deduction.

Myth 4

"It's too late to set one up this year."

The truth

For most businesses, a Cash Balance plan can be established and funded up to the due date of the business tax return (including extensions) — so a plan started in Q2 or Q3 can still capture last year's deduction.

Myth 5

"Once I'm in, I'm locked in forever."

The truth

The IRS expects a plan to be permanent, but in practice most Cash Balance plans are designed to run 3–5 years, after which they can be frozen or terminated. Contributions can also be adjusted down within a range each year if cash flow tightens.

Myth 6

"The investments have to be conservative / safe / boring."

The truth

The plan has a stated interest crediting rate (commonly 4–5%), but the portfolio backing the plan can be invested more aggressively. Investment surplus or shortfall is reconciled by the actuary each year.

Myth 7

"If this strategy were any good, I'd already know about it."

The truth

Cash Balance plans are used by every major professional services firm, law partnership, and medical group in the country. What makes them underused at the small-business level is that most tax preparers don't model them — not because the strategy is unknown, but because it sits at the intersection of tax, actuarial, and investment advice that few single professionals carry under one roof.

Capital Wealth Process

How we design and run your Cash Balance plan

1. Census & eligibility

We collect compensation and demographic data for every person who would be covered by the plan — owner(s), partners, and staff — and identify which employees are eligible under the rules you choose (age 21 + 1–2 years of service is typical).

2. Actuarial modeling

Our actuary runs multiple plan-design scenarios: different target benefits, staff allocation formulas, and integration with your existing 401(k). Each scenario is quoted with the owner's allowable contribution, the minimum required staff cost, and the total deduction.

3. Choose the design

You pick the design that fits your cash flow, your staff cost tolerance, and your deduction goal. We document it, draft the plan, and file the adoption paperwork.

4. Fund and invest

You make the employer contribution to the plan's trust. We manage the plan's assets under a target interest crediting rate — typically a diversified portfolio designed to earn the crediting rate net of fees with minimal variance.

5. Annual administration

We handle the 5500 filing, actuarial valuation, and participant benefit statements. You receive a one-page summary of your allowable contribution range for the coming year.

6. Exit and rollover

When the plan term ends or you retire, each participant's account balance rolls directly to an IRA — no annuitization, no surrender charges. Continue the money manager relationship with Capital Wealth or take the assets elsewhere.

What To Bring Us

If you want to see your number

Most business owners can get a preliminary Cash Balance projection with just these three pieces of information. We'll run the scenarios and show you what your maximum allowable contribution looks like — before you commit to anything.

1. Your entity structure

S-corp, C-corp, sole proprietor, partnership, or LLC. Determines how compensation is defined for plan purposes and how the deduction flows to your return.

2. A brief census

Just names (or initials), dates of birth, hire dates, and rough annual compensation for anyone who would be covered — owner(s), partners, and staff. Typically 5–15 minutes of work.

3. Your existing 401(k) / SEP

Plan document and last year's Form 5500 if you have one. We coordinate the Cash Balance design with the existing plan so the two stack cleanly.

See your Cash Balance contribution number

Send us your census and we'll model the maximum allowable contribution under multiple plan designs — plus the stacked 401(k) and profit-sharing tier — so you can see your full potential deduction before you decide whether to open a plan.

Book a Cash Balance Review