What is a Cash Balance Plan? Is a Cash Balance Plan Right for My Business?

If you're a business owner or high-earning professional looking to reduce taxes and accelerate retirement savings, a Cash Balance Plan might be the most powerful tool you’ve never considered. These plans go well beyond traditional retirement savings strategies and can create significant long-term advantages.

Let’s explore how they work and whether your business could benefit.

What Is a Cash Balance Plan?

A Cash Balance Plan is a type of retirement plan that functions like a hybrid between a traditional pension and a 401(k). While technically defined as a “defined benefit” plan, it feels more like a personal retirement account because each participant has an individual hypothetical balance.

Each year, the employer contributes a set amount, often tens or even hundreds of thousands of dollars per participant, plus a guaranteed interest credit. These contributions grow tax-deferred and can be rolled into an IRA at retirement.

Why Use a Cash Balance Plan?

1. High Contribution Limits

Depending on your age and income, you may be able to contribute well over $100,000 per year. This is far above the combined 401(k) and profit-sharing limit of $69,000 for 2024 (or $76,500 with catch-up contributions).

2. Significant Tax Deductions

All contributions are tax-deductible to the business. For owners in high tax brackets, this can reduce current-year taxable income substantially and shift more money toward future retirement goals.

3. Accelerated Savings for Late Starters

If you’ve built your business before building your retirement accounts, a Cash Balance Plan offers a rare chance to catch up fast.

4. Recruiting and Retention Tool

For firms with multiple partners or valuable employees, these plans can offer strong incentives for retention and reward, especially when layered with an existing 401(k) plan.

Who Should Consider a Cash Balance Plan?

Cash Balance Plans are a strong fit for:

• Business owners with consistently high income ($250K+)

• Partners at medical, legal, or consulting firms

• Solo professionals with minimal W-2 staff

• Entrepreneurs already maxing out 401(k) limits

• Owners age 40 and up who want to catch up quickly

• Businesses with predictable cash flow

Even in firms with employees, well-designed plans can allocate larger percentages to owners while keeping employee costs efficient.

Key Considerations and Drawbacks

These plans are powerful, but they require thoughtful design and commitment.

1. Annual Funding Requirement

Once implemented, the IRS expects consistent funding. Plans can be frozen or adjusted later, but they're not intended to be turned on and off each year.

2. Administrative Complexity

Cash Balance Plans require actuarial certification, annual IRS filings, and custom plan documents. They are more complex than a 401(k), but with the right third-party administrator, this can be streamlined.

3. Employee Participation

If you have employees, you’ll need to include them and meet nondiscrimination rules. However, the plan can be structured to keep contributions reasonable for staff while maximizing benefits for ownership.

Can I Combine It With a 401(k)?

Yes, and you should. The best strategy is often to “stack” a Cash Balance Plan with a 401(k) Profit Sharing Plan. This setup can allow a business owner to contribute well over $200,000 per year across both plans, depending on age and income.

This dual-plan structure is especially effective for professional partnerships and solo practices.

Is a Cash Balance Plan Right for You?

Ask yourself:

• Are you earning well into six figures?

• Have you already maxed out your 401(k)?

• Do you want to contribute more and reduce taxes?

• Do you have a predictable cash flow?

• Are you 40 or older and want to catch up fast?

If the answer is yes to most of these, a Cash Balance Plan is worth exploring.

Final Thought

Cash Balance Plans are not just for large corporations. They are often the smartest solution for high-income business owners and professionals who want to supercharge retirement savings while minimizing taxes.

At Atlantic Edge, we help clients design and implement these plans in a way that fits their business structure, tax goals, and long-term vision.

If you think this might be a fit for your business, let's talk. We can help you determine if this valuable strategy works for you.

Disclosures: The information provided in this article is for informational and educational purposes only and should not be construed as personalized investment, tax, or legal advice. Atlantic Edge Private Wealth Management is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. All investments involve risk, including the potential loss of principal. Past performance is not indicative of future results. You should consult your financial advisor, tax professional, or legal counsel before making any financial decisions.