Cash Balance Plans: A Tax-Saving Strategy for High-Earning Entrepreneurs

This week’s insight spotlights cash balance plans and how they, or other retirement savings vehicles, could save you big dollars come tax time.

Small business owners are increasingly taking advantage of cash balance plans, a defined benefit retirement account that uses annual pay credits and interest credits for funding. Introduced for larger companies, many small business owners have gotten in on the action, particularly high-earning entrepreneurs. A cash balance plan combines features of traditional pensions and 401(k)s, allowing for significantly higher annual contributions versus standard retirement accounts.

You could hypothetically set aside more than $380,000 yearly in a cash balance plan, and more than 20,000 businesses offer it to their workers, holding $1.2 trillion in assets as of the latest data. An individual’s max contribution depends on their age and income—contributions are generally tax-deductible for the business and grow tax-deferred for the individual. Cash balance plans can be such a money-saver that they have garnered controversy, with critics arguing that they are windfalls for the rich.

You must realize, however, that plan assets will eventually be taxed. As with a pre-tax 401(k) and traditional IRA, having large tax-deferred accounts may result in big required minimum distributions in retirement, potentially pushing you into a high tax bracket. Once retired, a former participant may elect to receive an annuity based on the account balance or choose a lump sum benefit. In short, cash balance plans are by no means a free lunch, and there are tricky financial planning implications.

There are other drawbacks, too. For instance, they are complex and costly to administer, requiring annual actuarial certifications and ongoing management. Solo business owners would have to outsource such tasks—more time, more money, and possibly more headaches. Cash balance plans should be considered usually only if you have an established business with an HR team and want to supercharge your retirement savings. Being a pension plan, the employer bears the investment risk, as the plan guarantees a specific benefit to its participants. The Pension Benefit Guaranty Corporation (PBGC) is the plan’s ultimate backstop, though some smaller plans may have that coverage.

Cash balance plans are often used in tandem with, but not in replacement of, more common 401(k) plans for moderate-sized businesses. They might not be the best fit for solopreneurs and smaller firms. I often favor the more straightforward strategy of plopping $70,000 annually (the 2025 limit) into a solo 401(k)–$23,500 as an employee contribution and up to $46,500 as an employer contribution with additional catch-up contributions available to those aged 50 and up.