Cash balance & defined benefit plans: the deduction past the 401(k) limit
The short answer
Once a Solo 401(k) or SEP-IRA is maxed out, a cash balance plan (a type of defined benefit plan) is how owners in their mid-40s to 60s push far more into retirement, pre-tax. Contributions are actuarially calculated to fund a promised future benefit, so an owner in their mid-50s can often deduct $150,000 to $300,000+ in a single year — multiples of what a 401(k) alone allows. The tradeoff: it's a real, actuarially funded plan with required annual contributions and, if you have employees, a cost to cover them too.
Who this works for — and who it doesn't
Good fit
- Owners age 45+ with stable, high, and predictable income who want to shelter well beyond 401(k) limits
- Businesses that already max a 401(k)/profit-sharing plan and want more capacity
- Owners who can commit to funding the plan for several years, not just one good year
Not a fit
- Younger owners — the actuarial math favors older ages; the deduction capacity is much smaller in your 30s
- Businesses with volatile or unpredictable income that can't commit to required annual funding
- Owners with a large staff where covering employees erodes too much of the benefit
How it works
- An actuary designs the plan around a target retirement benefit, which drives the required annual contribution — this is not a number you pick yourself.
- The plan is typically paired with a 401(k) and profit-sharing plan underneath it, layering contribution capacity.
- Contributions are tax-deductible to the business and grow tax-deferred inside the plan, same as any qualified retirement plan.
- If you have employees, nondiscrimination testing generally requires contributions on their behalf too — often a modest percentage of pay, but a real cost that has to be underwritten before adopting the plan.
- Required minimum funding applies annually; missing it triggers excise tax, so this is a commitment, not a lever to pull only in a great year.
A worked example
Marcus, 54, owns a profitable consulting S-corp with two employees and wants to shelter as much as possible ahead of retirement.
Marcus's combined plan contributions (illustrative)
Illustrative only — actual capacity depends on age, income history, plan design, and compensation, and requires an actuarial calculation specific to the owner.
Common mistakes that get expensive
- Setting up the plan without modeling employee coverage cost first
- Treating the contribution as optional in a down year without understanding the funding and excise-tax consequences
- Skipping the 401(k)/profit-sharing layer underneath, leaving capacity on the table
- Not budgeting for ongoing actuarial and administration fees, which are real annual costs on top of the contribution itself
Frequently asked questions
How is a cash balance plan different from a Solo 401(k)?
A Solo 401(k) caps combined contributions in the mid five figures per person. A cash balance plan is a defined benefit plan that can allow contributions well into six figures for an older, high-earning owner, because the contribution is based on funding a target retirement benefit, not a flat annual limit.
Do I have to cover my employees too?
If you have employees, yes — nondiscrimination testing generally requires meaningful contributions for eligible staff, though the required percentage is often far smaller than the owner's. This cost has to be modeled before adopting the plan, not discovered after.
Can I stop contributing if a bad year hits?
Not easily. Defined benefit and cash balance plans carry required minimum funding obligations set by an actuary. Reducing or freezing contributions requires a plan amendment and sometimes actuarial and legal cost — this is a multi-year commitment, not a strategy to turn on and off annually.
Maxed out your 401(k) and want more capacity?
We'll model the actuarial contribution at your age and income, the cost of covering any staff, and whether the multi-year commitment actually pencils for your business.
Book a free consultation