A: A cash balance plan is a type of defined benefit retirement plan that allows business owners to make significantly higher tax-deferred contributions than traditional retirement accounts like IRAs or 401(k)s. It’s especially useful for high-income earners who may have delayed saving for retirement while reinvesting in their business. These plans are employer-funded, meaning the business contributes on behalf of employees, and each participant has an individual account with options for a lump sum or lifetime annuity upon retirement. Contributions are tax-deductible for the business and grow tax-deferred for the participant, offering both retirement savings and tax reduction benefits.
Cash balance plans are often paired with 401(k)s and profit-sharing plans, and they’ve grown rapidly in popularity. They’re insured by the Pension Benefit Guaranty Corporation (PBGC), and assets are generally protected from creditors. One of the biggest advantages is the high contribution limit—up to $3.5 million lifetime as of 2025—with annual limits based on age, salary, and retirement goals. However, employers bear the investment risk and must meet minimum annual funding requirements. Plans typically last three to five years and require actuarial oversight, which can increase setup and maintenance costs. Still, the long-term tax benefits often outweigh these expenses. Participants leaving a plan can roll over funds to another employer’s plan, an IRA, or cash out. Importantly, withdrawals are taxed. Cash balance plans are ideal for sole proprietors or small businesses with up to 10 employees, especially those able to contribute large sums. They also offer flexibility in customizing contribution levels across employee classes. For business owners seeking to accelerate retirement savings, reduce taxable income, and offer competitive employee benefits, cash balance plans are a strategic option worth exploring with a financial advisor.
Cash Balance Plans are long-term retirement savings vehicles. Withdrawals are subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. While we are familiar with the tax provisions of the issues presented herein, as financial advisors of Raymond James, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.