High net worth individuals (HNWIs) often face a unique challenge: they earn well beyond the contribution limits of traditional retirement plans, yet they still want to maximize tax deferral, reduce current income tax liability, and accelerate retirement savings. One powerful—but often overlooked—tool for achieving these goals is the Cash Balance Plan.
When properly structured, a Cash Balance Plan can allow HNWIs to contribute hundreds of thousands of dollars annually, with substantial tax-deductible contributions, tax-deferred growth, and the ability to shelter significant wealth from taxes.
What Is a Cash Balance Plan?
A Cash Balance Plan is a type of defined benefit retirement plan that shares characteristics with both traditional pensions and 401(k)s:
- It guarantees a specific retirement benefit, like a pension.
- It shows hypothetical account balances, like a 401(k), making it easier to understand for participants.
Each participant’s account grows annually with:
- Pay Credits – a percentage of compensation or a flat dollar amount.
- Interest Credits – a guaranteed or market-based rate of return (e.g., 5% fixed or tied to the 30-year Treasury rate).
The employer funds all contributions. At retirement (or separation), participants can take a lump sum (rolled into an IRA) or an annuity.
Key Benefits for High Net Worth Individuals
- Massively Increased Tax-Deferred Contributions
Traditional 401(k) plans cap annual contributions at $23,000 (2025 limit) plus $7,500 catch-up for those over 50. By contrast, Cash Balance Plans allow annual contributions of up to $100,000–$400,000+, depending on age and income.
Age Max Contribution (Approximate, 2025)
45 ~$200,000
55 ~$300,000
65 ~$400,000+
These contributions are fully tax-deductible, dramatically reducing taxable income for high earners.
Example: A 55-year-old physician earning $800,000 could contribute:
- $330,000 to a Cash Balance Plan
- $69,000 to a 401(k)/profit-sharing plan
- Total: ~$400,000 in tax-deferred retirement contributions
This can result in a six-figure federal income tax savings each year.
- Accelerated Retirement Savings
HNWIs who started saving later in life or have experienced large recent income growth can use a Cash Balance Plan to “catch up” on retirement savings quickly.
With compounding and tax-deferred growth, even a 10-year funding window can generate millions in retirement assets, especially when paired with existing plans.
- Sheltering Business or Windfall Income
For business owners or self-employed professionals (doctors, lawyers, consultants), Cash Balance Plans are ideal for:
- Reducing taxes on windfall years
- Shifting income into tax-deferred accounts
- Using excess cash flow efficiently, rather than facing high tax bills
If you’re in a top marginal tax bracket (37% federal + state), every $100,000 contributed could save $40,000–$50,000 in taxes annually.
- Fully Compatible with 401(k) and Profit-Sharing Plans
Cash Balance Plans can be layered on top of existing 401(k) plans, significantly increasing the total amount deferred each year.
This is known as a “combo plan” strategy, and it works especially well for:
- Professional services firms (law, medicine, finance)
- Solo entrepreneurs and partners
- Business owners with few or no employees
- Creditor Protection
In most states, Cash Balance Plans enjoy strong creditor protection under ERISA. This makes them attractive asset protection vehicles for professionals and business owners with potential liability exposure (e.g., doctors or real estate developers).
- Exit and Succession Planning Tool
Business owners planning to retire or sell their company can use a Cash Balance Plan to:
- Accelerate tax-deductible retirement savings in final working years
- Reduce income taxes during peak income periods
- Create a retirement “golden parachute” outside the value of the business
Design and Compliance Considerations
Eligibility & Setup
- Typically requires a corporation, LLC, or sole proprietorship.
- Must be established by December 31 to count for that tax year.
- Custom actuarial calculations determine contributions and funding.
Employee Participation
- Contributions must be non-discriminatory, meaning some contributions may be required for employees.
- Strategies like cross-testing and vesting schedules help minimize cost while meeting IRS rules.
Long-Term Commitment
- Ideally maintained for at least 3–5 years.
- Contributions may be flexible year to year, but not optional without plan amendment.
Investment Considerations
- Conservative asset allocation typically used to align with the interest crediting rate.
- Avoid excess volatility to prevent funding surprises.
Who Should Consider a Cash Balance Plan?
Cash Balance Plans are ideal for:
- Business owners or professionals aged 40–65 with high, stable income
- Individuals seeking large tax deductions
- Professionals who’ve maxed out 401(k)/IRA options
- Solo entrepreneurs or small partnerships with few employees
- Individuals behind on retirement savings or expecting a liquidity event
Conclusion
Cash Balance Plans offer high-net-worth individuals a rare blend of significant tax deductions, accelerated retirement savings, and robust asset protection. When integrated with existing retirement strategies and guided by skilled professionals, they can become one of the most effective and compliant tax shelters available today.
However, the success of these plans lies in proper customization. It’s essential to collaborate with an experienced plan administrator, CPA, and financial advisor to determine if a Cash Balance Plan aligns with your financial goals—and how to structure it for optimal benefits.Want to explore how a Cash Balance Plan could work for you? Schedule a consultation with Foresight CPAs and discover how our team can help you maximize your tax strategy and secure your financial future.
