What Is a Cash Balance Plan? A Powerful Retirement Tool for High-Income Earners
When it comes to retirement planning, most people are familiar with 401(k)s and IRAs. But for high-income earners looking to supercharge their retirement savings and reduce taxable income, cash balance plans offer a powerful and often underutilized solution.
In this article, we’ll explore what a cash balance plan is, how it works, who it is generally for, and the major benefits of adopting this strategy.
What Is a Cash Balance Plan?
A cash balance plan is a type of defined benefit retirement plan that combines features of traditional pensions with those of defined contribution plans like 401(k)s. Unlike a 401(k), where contributions are discretionary and dependent on market returns, a cash balance plan promises a specific retirement benefit funded by the employer.
Each participant has a hypothetical account that's credited annually with two things:
Pay credit: A percentage of salary (e.g., 5% to 10%)
Interest credit: Either a fixed rate (e.g., 4%) or a variable rate tied to an index
How Cash Balance Plans Work
Here’s a quick breakdown:
Employer-funded: The business is responsible for funding the plan each year based on actuarial calculations.
Tax-deferred growth: Contributions and growth are tax-deferred, significantly reducing current tax liability.
Portable benefits: Unlike traditional pensions, cash balance plans provide individual account balances that employees can roll over to an IRA if they leave the company.
Annual contribution limits: Much higher than 401(k) limits—often exceeding $100,000 annually, depending on age and income.
Who Should Consider a Cash Balance Plan?
Cash balance plans are ideal for:
Business owners and partners
Doctors, dentists, and law firm partners
Self-employed professionals
High-income earners nearing retirement
If your business has consistent profits and you want to maximize tax deductions while accelerating retirement savings, a cash balance plan can be a smart move.
Benefits of a Cash Balance Plan
1. Tax Advantages
Contributions are tax-deductible to the business and grow tax-deferred. This can reduce current income taxes substantially.
2. Large Contributions
While a 401(k) caps total annual contributions (employee + employer), a cash balance plan can allow contributions of over $100,000–$300,000 annually based on age and other factors.
3. Attract & Retain Talent
Offering a cash balance plan can help attract high-caliber employees and partners, especially those seeking robust retirement benefits.
4. Combine with a 401(k)
Many companies combine a cash balance plan with a 401(k)/profit-sharing plan for even greater savings and flexibility.
Key Considerations and Risks
Complexity and Cost: Cash balance plans require actuarial services, annual filings, and administrative oversight. IntelliVest can help connect you with a variety of actuaries so you can pick the right one for you.
Employer Liability: The employer guarantees the benefit, so investment risk and funding requirements lie with the business.
Long-Term Commitment: These plans are best suited for businesses with stable cash flow.
Setting Up a Cash Balance Plan
You’ll need the help of:
A pension actuary
A financial advisor
A CPA or tax advisor
The setup usually involves plan design, funding strategy, and coordination with existing retirement plans (like a 401(k)).
Final Thoughts
For successful business owners and high-income professionals, a cash balance plan can be a game-changer. It provides a legal, IRS-approved method to maximize retirement savings, reduce taxes, and build long-term financial security.
If you're earning more than you can shelter with a 401(k) and looking for advanced tax planning strategies, it's time to explore a cash balance plan.
Want to learn more about Cash Balance plans?
If you need help with reviewing your cash balance plan or would like to learn more about cash balance plans, give our financial advisors a call. We offer free financial consultations. Contact us here to schedule an appointment.
Disclosure
IntelliVest Wealth Management is a Registered Investment Advisor Headquartered in Spartanburg South Carolina. This is not a solicitation or financial advice. Please note that this information may not always be accurate as changes to laws and regulations change from day to day. This article should only be used for educational purposes. Please consult with IntelliVest Wealth Management about your personal financial situation.
