What a Cash Balance Plan Is and Who It Actually Makes Sense For
Sam's List Editorial | 2026-06-23
What a Cash Balance Plan Is and Who It Actually Makes Sense For A 50-something dentist clearing $700,000 a year maxes out her 401(k) and thinks she's done. She just left the single largest tax deduction available to a small-business owner on the table. A cash balance plan can let that same dentist deduct more than $200,000 a year for retirement, on vetted of the 401(k) she already has. Most CPAs never mention it. Here is the cash balance plan explained the way a smart founder friend would actually tell it to you — what it is, who it fits, and the catch nobody puts in the brochure. The cash balance plan explained: it's a 401(k)'s much bigger sibling A cash balance plan is a type of defined benefit plan , the same legal category as the old-school pensions your grandparents had. The IRS treats your contributions as funding a future "benefit," not as an account balance you choose each year — and that distinction is the whole reason the deduction is so large. A 401(k) is a defined contribution plan. In 2025, you can defer $23,500 of salary (plus a $7,500 catch-up at 50+), and total additions from all sources cap at $70,000 under IRC §415(c). A cash balance plan plays by a different rulebook. Instead of capping your annual contribution, the law caps your eventual benefit under IRC §415(b) — currently a maximum annuity of $280,000 a year for 2025 ($290,000 for 2026). To fund a benefit that big, the required annual contribution can run far higher than any 401(k) ever allows. How much you can actually shelter Here's the part that gets people's attention. Cash balance plan contribution limits aren't a flat number — they scale with your age, because someone who's 58 has fewer years to fund the same retirement benefit than someone who's 38. The math runs roughly like this: A 40-year-old might be able to contribute around $100,000 a year. A 50-year-old is often in the $150,000–$200,000 range. A 60-year-old can frequently push past $250,000, and as you near retirement the figure can approach $300,000 or more. Those are illustrative ranges — your real number comes from an actuary, not a calculator. But the pattern holds: the older and higher-earning you are, the more this strategy is built for you. Over a 10-year participation window, the lifetime lump sum a cash balance plan can hold tops out around $3.6 million per person under the IRC §415(b) limits. Cash balance plan contribution limits stack on your 401(k) A cash balance plan doesn't replace your 401(k). It sits on vetted of it. A typical setup pairs three layers: the 401(k) salary deferral, a profit-sharing...
