If you’re a business owner, high earner, or partner in a professional firm looking to significantly boost your retirement savings (and lower your taxable income) a cash balance plan might be worth exploring. These plans offer contribution limits far beyond what traditional 401(k)s allow and can be layered on top of existing retirement plans. At Stone Oak Wealth, we help clients assess whether this advanced strategy fits their goals, business structure, and tax outlook.
Cash balance plans are technically defined benefit plans (or pensions) that share key characteristics with defined contribution plans such as 401(k)s and 403(b)s. These hybrid plans have generous contribution limits that increase with age, and they are often stacked on top of a 401(k) and/or profit-sharing plan. This can help partners in professional firms and other business owners to maximize or catch up on retirement savings and reduce their taxable incomes.
On top of the $70,000 maximum contribution to a 401(k), a 65-year-old could save as much as $329,000 in a cash balance plan in 2025, while a 55-year-old could save $248,000 on a tax-deferred basis until the account reaches a maximum balance of about $3.6 million (IRS limits adjusted annually for inflation).1–2
Employees benefit too
A cash balance plan can also be a powerful tool for employee recruitment and retention. As with other defined benefit plans, employees are promised a specified retirement benefit, and the employer funds the plan and selects investments. However, each participant has an account with a “cash balance” for record-keeping purposes, and the vested account value is portable, which means it can be rolled over to another employer plan or to an IRA.
But unlike a 401(k), the participant’s cash balance when benefit payments begin can never be less than the sum of the contributions made to the participant’s account, even if plan investments result in negative earnings for a particular period. This means the employer bears all the financial risk.
Funding the plan
The employer’s annual contribution amount is actuarially determined based on plan design and participant demographics. Generally, there are two types of contributions made for each employee. The first is a pay credit, which is either a fixed amount or a percentage of annual compensation, and the second is a fixed or variable interest crediting rate (ICR). The ICR can be set to equal the actual rate of return of the portfolio if certain diversification requirements are met, which helps reduce the employer’s investment risk and the possibility of having an underfunded plan due to market volatility.
Businesses may deduct employee contributions, so current-year tax savings may offset some of their contributions. Still, a cash balance plan is typically more cost-effective for a sole proprietor or the owner of a small firm with few employees.
The bottom line is this: for the right business owner, a cash balance plan can create powerful tax and retirement advantages. While they come with complexity and funding obligations, the upside is meaningful… especially for those who need to catch up on savings later in their career. At Stone Oak Wealth, we help you weigh the trade-offs and design a plan that’s aligned with your business, your people, and your long-term financial vision.
1) FuturePlan, 2025; 2) The Wall Street Journal, March 8, 2025
Sources: Broadridge Investment Management Solutions
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