How a Cash Balance Plan Could
Cut Your Tax Bill by Six Figures

If you own a professional practice and you are already maxing out a Solo 401(k) or SEP IRA, you may be leaving one of the most powerful retirement planning tools in the tax code completely unused.

It is called a cash balance plan. And for the right business owner, combining it with a 401(k) can generate annual tax deductions that dwarf what either plan produces alone.

What Is a Cash Balance Plan?

A cash balance plan is a type of defined benefit plan. Unlike a traditional 401(k) or SEP IRA, where your retirement outcome depends on investment performance, a cash balance plan promises each participant a defined benefit expressed as a hypothetical account balance.

Here is how it works: each year, the plan credits each participant's account with a pay credit, typically a set dollar amount or percentage of compensation, and an interest credit, a guaranteed rate of return established by the plan. At retirement, the participant can take the accumulated balance as a lump sum or convert it to an annuity.

From your perspective as a business owner, the plan is funded by annual employer contributions that are fully tax-deductible as a business expense.

The Combination That Changes the Math

The real power of a cash balance plan comes when it is paired with a 401(k) profit sharing plan in what is commonly called a combo plan.

A 401(k) profit sharing plan allows you to make both employee deferrals and employer profit sharing contributions, up to a combined limit of $72,000 in 2026, with additional catch-up contributions available if you are 50 or older. A cash balance plan stacks on top of this, dramatically increasing the total amount you can set aside and deduct in a single year.

For a practice owner in their 50s, combined contributions to both plans can reach $200,000 or more annually. For an owner in their 60s, the number can exceed $300,000. Every dollar contributed is deductible as a business expense.

How Contributions Scale With Age

One of the defining features of a cash balance plan is that the allowable contribution increases with age. Because the plan is designed to fund a defined benefit by a specific retirement date, older participants have fewer years for contributions to compound before that date, so the actuarially required annual funding is higher.

For owners who feel behind on retirement savings, this feature makes cash balance plans particularly compelling. The plan is specifically designed to allow larger contributions in fewer years.

Who It Works Best For

Cash balance plans are not the right tool for every business. They work best when several conditions are present.

Consistent, High Income

The plan requires mandatory contributions each year regardless of business performance. Owners with variable or unpredictable revenue can face a funding obligation in a difficult year that creates cash flow pressure. Plans work best when income is stable enough that the annual contribution is predictable.

A Smaller Team

Cash balance plans require employer contributions not just for the owner, but for eligible employees as well. The more employees you have, the higher the cost of funding their benefits, which can reduce or eliminate the tax advantage for the owner. Plans work best with few or no non-owner employees, or with a workforce structure that limits long-term benefit liability.

A High Tax Bracket

The deduction is most valuable when income is taxed at the highest rates. For owners who have already maximized a 401(k) or SEP IRA and are still facing a substantial tax bill, a cash balance plan targets the portion of income that would otherwise be taxed at the top rate.

A Multi-Year Commitment

Cash balance plans are not a one-year strategy. They are designed to run for at least three to five years and ideally longer. Setting one up and terminating it quickly can create complications and costs that outweigh the benefit.

The Actuary Requirement

Unlike a 401(k) or SEP IRA, a cash balance plan must be administered by an enrolled actuary. The actuary sets the contribution formula, calculates the required annual funding, certifies the plan's actuarial soundness, and files required reports with the IRS.

This adds cost. Administration fees typically run $2,000 to $5,000 or more annually depending on plan complexity and the number of participants. For an owner contributing $200,000 or more per year in deductible contributions, this cost is generally straightforward to justify. But it is worth factoring into the analysis upfront.

The Questions That Matter Most

Rather than evaluating a cash balance plan in the abstract, the right approach is to work through the questions specific to your situation.

The Bottom Line

A cash balance plan is not the right choice for every professional practice owner. But for the right profile, a high-income practice with a small team, stable revenue, and a few years of runway before retirement, it is one of the most powerful tax and retirement planning strategies available.

Most owners who would benefit from this strategy have never heard of it. That is the gap this article is meant to close.

Thanks to SECURE Act 2.0, the window is longer than most people think. But the conversation still needs to happen before you file, not after.

Contribution limits and plan requirements sourced from the Internal Revenue Service (irs.gov). Cash balance plan administration requires an enrolled actuary as defined under ERISA. Contribution figures are estimates based on typical actuarial calculations and will vary based on participant age, compensation, and plan design. This article is for educational purposes only and does not constitute personalized financial advice. 1618 Wealth does not provide tax advice. Please consult a qualified tax advisor and financial planner for guidance specific to your situation.