For business owners, partners and high-income professionals looking to boost retirement savings and reduce taxes, cash balance plans offer a compelling solution.
They combine the structure of a defined benefit plan with the portability of a 401(k), making them a modern retirement tool with significant advantages.
What is a cash balance plan?
This plan is a tax-qualified retirement strategy that operates much like a traditional pension while maintaining the feel of a 401(k).
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Each participant has an individual account that grows annually through two components: employer contributions (defined by a formula) and an interest credit usually tied to a specified rate in the plan document.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
Upon retirement or departure from a job, the account balance can be rolled over into an IRA or another qualified plan.
While the mechanics are based on actuarial formulas, the end-user experience is straightforward: Participants see a clear account balance and can track growth over time, just as they would in a defined-contribution plan.
Why employers choose them
Perhaps the biggest advantage of a cash balance plan is the ability to allocate significantly more than what's allowed in a traditional 401(k) or profit-sharing plan — often more than $250,000 per year for older, high-earning participants.
These contributions are tax-deductible, grow tax-deferred and offer significant potential to reduce corporate or personal tax liability.
Business entities of all types can benefit. Corporations deduct contributions on their corporate tax returns, while partnerships and sole proprietors split the deduction between the business and the owners' personal filings.
The tax savings typically far outweigh the administrative cost of running the plan.
Beyond the tax advantages, these plans are a powerful way to attract, retain and reward key employees, especially in professional services firms such as law, accounting and medical groups.
In addition, assets in a cash balance plan are generally protected from lawsuits and creditors of the employer.
They've grown in popularity outside these industries as well, and the plans are now used by a wide range of businesses to support the larger contributions often made for business owners.
What to know before starting
Cash balance plans require an actuary to manage annual funding calculations, and there's an expectation of permanency; they're not intended as short-term strategies.
Contributions must generally be made every year, and the plan must meet minimum participation rules and nondiscrimination testing.
Consequently, these plans are often paired with a 401(k) and profit-sharing component to help meet those standards.
Staff and nonowner contributions typically fall in the 5% to 7.5% range of pay. The plans also have a lifetime IRS limit on how much an individual can accumulate, and most are covered by the Pension Benefit Guaranty Corporation (PBGC), though some are exempt, depending on structure.
Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.
Despite these requirements, plan designs can be flexible. Employers can periodically amend contribution levels, option to freeze benefit accruals and have the flexibility of terminating the plan over time.
Who should consider one?
Cash balance plans are ideal for firms in which owners and key employees consistently earn $500,000 or more annually and are seeking to contribute well beyond 401(k) limits.
They're particularly efficient when layered on top of existing retirement programs such as profit-sharing contributions of 3% or more.
Firms of any size can implement a plan, but the more key employees involved and the higher their desired contributions, the more efficient the plan becomes.
Final thoughts
Cash balance plans are a strategic retirement solution for those who want to catch up quickly, lower taxes significantly and reward themselves and key team members in the process.
With the right design and ongoing guidance, these plans can potentially deliver tremendous long-term value that far exceeds their complexity.
For high-income professionals looking for a smarter way to save, the cash balance plan might be a great opportunity.
Related Content
- Got a Cash Balance Pension? Understand Your Options
- Cash Balance Plans: Big Deductions and Big Retirement Savings
- The Pros and Cons of Cash Balance Pension Plans
-
How Five Retirees Turned Their Passion into a BusinessFor these entrepreneurs, later life has little to do with winding down. Find out how they turned hobbies and passions into businesses — and how you can, too.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
How Five Retirees Turned Their Passion into a Business
For these entrepreneurs, later life has little to do with winding down. Find out how they turned hobbies and passions into businesses — and how you can, too.
-
From Job Loss to Free Agent: A Financial Professional's Transition Playbook (and Pep Talk)
The American workforce is in transition, and if you're among those affected, take heart. You have the skills, experience and smarts that companies need.
-
A Financial Planner's Top Five Items to Prioritize When Your Spouse Is IllDuring tough times, it's easy to overlook important financial details, but you'll be so much better off if you take care of these things right now.
-
'Rich' Tricks to Volunteer and Donate in RetirementThere may be some tax benefits to giving back in retirement.
-
An Expert Guide to Outsmarting Inflation: Don't Let It Restrict Your RetirementInflation is often underestimated when estimating retirement income, education funding or investment returns. These strategies can help preserve your purchasing power and reduce your financial anxiety.
-
Your 401(k) Options Just Got More Complicated: Here's What You Need to KnowPrivate equity, real estate and expanded annuities are now options, but they are more complex, less flexible and more expensive to own.
-
One Big Beautiful Bill, One Big Question: Will We Keep Giving?The rules on charitable giving are changing. For some, tax deductions for donations are now an option. For others, that option may have been curtailed.
-
The 'Vinyl Rule' of Retirement: Plan for Two Sides in Your Next ActBecause “Life is what happens when you’re busy making other plans.”
