Most business owners think the 401(k) is where pretax saving ends. It is actually where it starts. There is a bigger door right next to it, and it has been legal the whole time.
It is called a cash balance plan. Legally, it is a defined-benefit pension — a plan that promises a set payout at retirement, like a teacher’s pension. But its statement reads like a 401(k) balance, on purpose.
What it is
Each year the business adds a pay credit — the contribution made for you, set by the plan document. The balance then grows by an interest credit — a promised growth rate, often 4–5%. No fund picking. No watching markets.
The magic is in the legal chassis. A 401(k) caps what goes in each year. A pension caps what comes out — a retirement benefit up to an IRS maximum near $280,000 a year.
An actuary — the math professional who prices pension promises — works backward from that payout. The actuary calculates what the business must contribute today to fund it by retirement. That contribution is generally a deductible business expense.
Why age wins
Here is the twist that should make older owners smile. The closer you are to retirement, the fewer compounding years the actuary can count on. So the plan must contribute more now to fund the same benefit.
Age, the enemy of every other retirement strategy, is the input that makes this one work.
In typical designs, an owner aged 55–60 with steady profits can often shelter $150,000–$300,000+ per year pretax. That is on top of the 401(k), not instead of it. The exact figure is set by the actuary each year, from your age, pay history, and the plan’s formula.
Stack the layers for 2026. The 401(k) deferral is $24,500. Add an $8,000 catch-up at 50-plus, or an $11,250 catch-up at ages 60–63. Then add the cash balance credit on top.
One hypothetical: a 58-year-old practice owner defers $24,500 plus the $8,000 catch-up, takes profit sharing, and adds a $220,000 pay credit. Total moved pretax: roughly $290,000 in one year. At a combined federal-plus-California rate in the 40s, that defers north of $115,000 in tax.
Who fits, what it costs
The screen is short and honest. Strong fits share four traits: consistent profits, an owner older than most of the staff, a 401(k) already maxed, and a closely held business.
Think medical and dental practices, law firms, CPA firms, contractors, consultants, and family businesses. Even high 1099 income — self-employment income reported on your own return — can sponsor a plan. Purely passive income generally cannot.
Now the myths. It is not a permanent lock-in; the IRS expects serious intent, which practitioners read as roughly three to five years. It is not only for big firms; owner-only businesses are the classic adopters. And employees do not carry the market risk — the employer makes up any shortfall against the promised rate.
The honest price tag: a third-party administrator, an enrolled actuary, annual government filings, and typically a few thousand dollars a year in fees. The bigger cost is discipline. The contribution is not optional the way profit sharing is.
The exits are real, though. Plans get amended, frozen, or terminated when life changes, and balances generally roll to an IRA and keep growing tax-deferred.
The starting document is one page: last year’s payroll census, with ages and pay. From that, a design study shows your share, the staff cost, and the tax line — before you commit to anything.