You maxed the 401(k) at $70,000 and still have $300,000 in profit that the tax code will tax at the top bracket. A cash balance plan is the tool that lets that profit fund retirement at $150,000–$290,000 per year, on top of the 401(k), with a deduction that can drop the effective rate by 20 points.
How It Works
A cash balance plan is a hybrid defined-benefit plan with a hypothetical account. The employer credits a percentage of pay and an interest credit annually; the account grows at the stated rate, and the benefit at retirement is the account balance.
Stacked on a safe-harbor 401(k) + profit sharing, the structure is: 401(k) up to $70,000 plus cash balance at $80,000–$220,000 depending on age and compensation. Older owners and highly compensated staff get the largest credits, because the plan tests as a defined benefit for nondiscrimination but is paired with the DC plan for gateway compliance.
Who Qualifies
- Age matters: A 55-year-old owner with 10 years to retirement can justify a $180,000 annual credit; a 35-year-old cannot justify the same because the benefit at retirement is similar for lower annual funding.
- Income matters: Stable profit above $400,000 is the usual floor — the contribution is mandatory in good and bad years, and missing it triggers excise tax.
- Staff cost: The plan requires meaningful contributions for rank-and-file staff — often 5–7% of pay — to pass nondiscrimination. If you have 12 employees, the owner’s $180,000 credit may cost $35,000 in staff credits. The tax savings still win, but the staff cost must be modeled.
Keep Your Finances Organized From Day One
A cash balance plan is a 5500-filing, PBGC-exempt (for most small professional firms) commitment that rewards the ledger that can show profit stability, not just a good year.
Beancount.io keeps the contribution, deduction, and staff cost as version-controlled transactions that tie to the 5500 and to the forecast. Get started for free and make the shelter a planned contribution, not a surprise.