How to boost retirement savings and reduce your tax liability
It’s common for business owners to prioritize reinvesting profits over saving for retirement. But when it’s time to catch up, traditional retirement plans like IRAs and 401(k)s often fall short. For high-income earners, a cash balance plan can offer a strategic solution, allowing for accelerated retirement savings and significant tax advantages.
What Is a Cash Balance Plan?
A cash balance plan is a type of defined benefit pension plan managed by the employer. Unlike 401(k)s, it doesn’t rely on employee contributions. Each participant has an individual account with a promised benefit, either as a lump sum or lifetime annuity. These plans are insured by the Pension Benefit Guaranty Corporation (PBGC) and generally offer protection from creditors, depending on business structure and state laws.
Cash balance plans have grown rapidly in popularity over the past two decades and are often paired with 401(k) and profit-sharing plans. They allow for substantial tax-deferred contributions, which can result in meaningful tax savings for the business. Contributions are tax-deductible, and the plan’s assets grow tax-deferred for participants.
Why It Matters for Business Owners
One of the most attractive features of a cash balance plan is its high contribution limit. As of 2025, the lifetime limit is $3.5 million, with annual limits based on salary, age, and the plan’s target balance. Business owners can also contribute to other retirement plans simultaneously, such as a 401(k), maximizing their overall retirement savings.
When a participant leaves the company, they typically have several options for their account balance: leaving it in the plan, rolling it over to a new employer’s plan or an IRA, or cashing it out.
Considerations Before You Start
While cash balance plans offer powerful benefits, they come with responsibilities. The employer bears all investment risk, meaning if the plan underperforms, the employer must make up the difference. There are also minimum annual funding requirements, and plans must typically remain active for three to five years. Setup and maintenance costs can be higher due to the need for actuarial oversight, but the long-term tax advantages often outweigh these expenses. It’s also important to note that withdrawals from the plan are taxed.
Who Should Consider a Cash Balance Plan?
Cash balance plans are ideal for high-income business owners who can afford to make large contributions and want to reduce their company’s tax liability. While larger organizations can offer these plans, they are especially beneficial for sole proprietors and small businesses with up to ten employees. The plans also offer flexibility in structuring contributions across different employee classes.
If you’re a high-income business owner looking to accelerate your retirement savings, enhance employee benefits, and take advantage of significant tax deductions, a cash balance plan could be the strategic edge your business needs.
Jodi Perez, CFP®, CEPA®
President & CEO, IFS
Wealth Manager, RJFS
20635 Amberfield Drive, Suite 102
Land O’Lakes, FL 34638
813-908-2701
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Independent Financial Services is not a registered broker/dealer and is independent of Raymond James Financial Services.
Any opinions are those of Jodi Perez and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
These accounts are often referred to as “hypothetical accounts” because they do not reflect actual contributions to an account or actual gains and losses allocable to the account. Both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life. However, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the benefit in terms of a stated account balance. Source: U.S. Department of Labor, Employee Benefits Security Administration.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Written By: Jodi Perez
Jodi Perez, CFP®, CEPA® is a seasoned financial advisor at Raymond James, specializing in personal financial planning for business owners.
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