Physicians often explore various tax-saving vehicles to mitigate their high tax burdens. Cash balance plans are a common recommendation for doctors in private practice or those with self-employed income, such as physician entrepreneurs and 1099 earners. 

A unique retirement plan in America often flies under the radar. It’s increasingly popular among wealthy doctors, lawyers, and business owners who use it to secure up to $300,000 in tax deductions annually. This retirement strategy, a cash balance plan, is gaining momentum among high-income professionals. Here’s how it works:  8558054325 billing 2032767572 option 2  2036392235 reference 120772 

Though 401(k)s are popular retirement savings tools, they come with contribution ceilings. Employees can contribute a maximum of $23,500 per year, and the combined employee and employer contribution limit is $70,000. While adequate for some, these limits are restrictive for those earning in the mid-six figures.    

The Wall Street Journal recently published an article about retirement planning for high-income earners, Stating that professionals like doctors, lawyers, and accountants often supplement their 401(k) plans with cash balance plans, allowing for tax-deferred savings of up to $3.6 million. For example, doctors Victor and Kate Louise Mangona saved $2.6 million over ten years, potentially reaching $10 million by retirement.   

According to the Journal, a radiation oncologist at Texas Oncology initiated a cash balance plan in 2019 to complement their 401(k). Unlike 401(k)s, cash balance plans, being technically pensions, are exempt from annual contribution limits. These plans can allow older, higher-earning individuals to contribute up to $380,000 annually, though limits vary. Originally designed for large companies, cash balance plans have recently gained popularity among smaller businesses.  Cash balance plans, also known as cash balance pension plans, are defined benefit plans, guarantee participants a specific retirement amount.

What are Cash Balance Plans 

Cash balance plans, a form of defined benefit plan, differ from traditional contribution plans. Instead of fixed annual contribution limits, they aim to provide a target retirement amount, typically around $3.6 million. The annual contribution is determined through actuarial calculations based on income and age, often exceeding $300,000.  

Cash balance plans have experienced rapid growth, now holding over $1 trillion in assets. While technically pensions, they share certain characteristics with 401(k)s, despite their complexity. 

These plans illustrate how wealthy professionals build multimillion-dollar retirement accounts by maximizing available tax breaks. The government, aiming to incentivize retirement savings, forgoes approximately $300 billion in annual tax revenue through tax-free contributions or withdrawals and tax-sheltered investment gains.  

In 2025, while 401(k) profit-sharing contributions are capped at $70,000 ($77,500 for age 50+), cash balance plans allow up to $403,000. These tax-deferred contributions directly reduce taxable income, with age-based maximums shown below. 

In 2020, the latest data available, nearly 23,000 employers offered cash balance plans, a significant increase from 1,477 in 2001, as reported by FuturePlan by Ascensus. These plans hold over $1.2 trillion in assets, compared to $12.5 trillion in 401(k)-type plans.   

How Does a Cash Balance Plan Work? 

Employers fund cash balance plans, guaranteeing promised benefits regardless of market fluctuations. Like 401(k)s, benefits accrue as an account balance, transferable to an IRA upon leaving employment. Cash balance plans permit significantly higher annual contributions than 401(k)s, with older, high-earning individuals potentially contributing up to $380,000 compared to the $70,000 401(k) limit ($23,500 employee, $46,500 employer). 

1. A cash balance is a defined benefit plan.
2. The employer bears the risk of investment loss- unlike 401(k) plan.
3. No participant self-direction. Money is pooled and invested using a conservative investment strategy with consistent yield, typically 3-5% as a goal.
4. A portion of the employees must participate or received extra contributions in the 401(k) plan.
5. These plans operate within a voluntary retirement system that incentivizes employer contributions by proportionally benefiting employees.

According another Wall Street Journal article states that those 50 and older have even higher 401(k) limits. In case of employer bankruptcy, the Pension Benefit Guaranty Corp. (PBGC) insures benefits up to a cap, except for plans with fewer than 26 participants at professional services firms, which are exempt.

Who Should Use a Cash Balance Plan? 

The WSJ articles states that cash balance plans are accessible only through employer sponsorship. While large firms initially adopted them in the 1990s, the trend has shifted towards smaller employers, such as medical practices and law firms. Notably, 61% of these plans are found in companies with nine or fewer employees (FuturePlan by Ascensus). Business owners, especially those aiming to maximize tax savings and exceed 401(k) contribution limits, are the primary users. To meet IRS non-discrimination requirements, these plans are often combined with 401(k)s, necessitating employer contributions for lower-earning staff. This makes cash balance plans particularly advantageous for smaller organizations.

Ideal candidates for cash balance plans include:  

• Individuals who are 35 years or older  
• earning $300,000 or more annually 
• You or your business partners want to increase your rate of retirement savings significantly
• And anticipating consistent income for at least three years 
• These plans are especially beneficial for business owners without employees. 
•  Despite the setup’s expense and complexity, the long-term tax benefits are highly valuable for qualifying individuals.   

Savings Limits    

Cash balance plans have IRS-set accumulation limits, currently around $3.6 million by age 62 and $3.8 million by age 68, adjusted annually for inflation. These limits aim to provide a substantial annual pension, though most participants opt for lump-sum rollovers instead. Older, higher-earning participants can contribute significantly more annually, up to $380,000 for those aged 66-70 and around $280,000 for those aged 55-59.  

Fees 

Cash balance plans generally hire investment managers and many employers guarantee an annual return of about 3% to 5%. Cash balance plans are more costly to administer than 401(k)s due to their complexity and the need for actuarial services. Setup costs for a small firm typically range from $3,000 to $5,000, with similar or higher annual administration fees, varying by participant count and plan features. More comprehensive plans also incur PBGC premiums.

Rollover 

Though intended for a duration of 10 years or more, these plans may be terminated sooner due to events like business sales. Cash balance plans are not a lifetime commitment. You can terminate them and transfer the funds into a 401(k) or IRA. More individuals should be aware of this flexible retirement planning option.     

Conclusion 

Comprehensive due diligence is essential for any tax-paying professional considering retirement or investment strategies. This article discusses the pros and cons in more depth. While cash balance plans, defined benefit plans with employer-borne risk, offer notable tax benefits for solo practitioners, they require careful evaluation. These plans are not recommended for owners or partners unwilling to exceed traditional contribution limits, provide substantial staff contributions, or demonstrate stable profit patterns.