Should Solopreneurs Add a Cash Balance Plan?
A 401k is steady and reliable transportation to retirement, but if you have more cash at hand, you may be able to upgrade to a faster model.
If you’ve been maxing out your Solo 401(k) and still feel your tax bill looks like it’s on steroids, there’s another tool you might not have considered: the Cash Balance Plan.
It’s not exactly a household name — even among financial pros — but for the right business owner, it can be one of the most powerful ways to save more for retirement while trimming down what you owe Uncle Sam.
What Exactly Is a Cash Balance Plan?
A Cash Balance Plan is a type of Defined Benefit (DB) plan, which makes it fundamentally different from a 401(k), a Defined Contribution (DC) plan.
Here’s the key distinction:
A 401(k) defines how much you contribute each year.
A Cash Balance Plan defines what benefit you’ll receive in retirement.
The twist? Instead of paying you a monthly pension like old-school DB plans, your benefit is tracked as a hypothetical account balance that grows with two components:
A Pay Credit (a percentage of your compensation), and
An Interest Credit (a fixed or indexed rate, typically around 5%).
When the plan ends — either when you retire or shut down the business — you can roll the entire balance into an IRA or 401(k) as a lump sum.
Every contribution is made by your business, and each dollar is tax-deductible.
Who Should Consider It?
Cash balance plans shine for independent physicians, consultants, and solopreneurs who expect to stay in business for a few years and want to contribute more than the 401(k) limits allow.
If you’re already putting the maximum into your Solo 401(k) ($70,000 for 2024, or $77,500 if 50+), a cash balance plan lets you add another layer of tax-deferred savings. Depending on your age and income, the contribution could range from $100,000 to over $250,000 annually — all pre-tax.
It’s especially attractive if you’re:
In a high tax bracket,
Nearing retirement, or
Looking to “catch up” on years when you couldn’t save much.
How Much Can You Contribute?
Unlike a 401(k), your contribution isn’t capped by the same annual IRS limits. Instead, an actuary calculates your maximum based on your age, income, and target retirement age (most often 62).
Think of it this way: the IRS lets you accumulate a benefit of roughly $3.5 million by age 62 (2025 value). Your annual contributions are whatever it takes — using the pay and interest credits — to get you there.
You can tweak these assumptions if your business or goals change, but they must stay within the IRS’s defined benefit framework.
What’s the Catch?
Every powerful deduction comes with fine print. Here’s what to watch out for:
Administrative complexity.
You’ll need an actuary to certify your contribution each year and ensure the plan stays compliant.Investment constraints.
Plans are designed to grow steadily — not like a volatile equity portfolio. If your returns overshoot or undershoot the assumed rate, you could be forced to adjust future contributions.Funding commitment.
You’re expected to make consistent contributions for several years. Skipping or underfunding can trigger penalties.Overfunding risk.
If you contribute too much and the plan outperforms expectations, the excess could be subject to an excise tax.Tax tradeoffs.
Just like 401(k) profit-sharing contributions, cash balance contributions reduce your Qualified Business Income (QBI) deduction.Future tax exposure.
Large pre-tax balances mean larger Required Minimum Distributions (RMDs) later — and possibly higher tax bills in retirement.
What If You Have Employees?
Cash balance plans must pass nondiscrimination testing, ensuring benefits don’t favor owners over employees.
For a solo practice or business with just one or two staff members, this can often be managed efficiently through cross-testing with your 401(k) plan. But if you have a larger team, it becomes a more expensive benefit to maintain — since you must fund contributions for them, too.
If you’re a lean operation, the math is generally in your favor.
If you’re a larger practice, weigh how much your staff will value this benefit relative to the cost.
What Are the Alternatives?
If you’re not ready to commit to a cash balance plan, you can still expand your retirement savings in other ways:
Mega Backdoor Roth: Use after-tax contributions and in-plan conversions for tax-free Roth growth.
Backdoor Roth IRA: Contribute and convert up to $7,000 ($8,000 if age 50+).
HSA: If eligible, contribute up to $4,300 single / $8,550 family (2025) and enjoy triple tax advantages.
Tax-efficient brokerage account: Invest in index funds or ETFs for long-term flexibility and capital gains control.
TaxSmart Takeaway
Cash balance plans aren’t for everyone. They make the most sense for:
A. Physicians and professionals approaching retirement who need to supercharge their savings, or
B. High earners who want to aggressively lower taxable income now while building future security.
They’re more complex and less flexible than a 401(k), but they can dramatically reduce your taxes and boost your retirement savings at the same time.
Before jumping in, always review a plan illustration with an actuary or pension specialist — not just your tax professional. The setup and funding rules are nuanced, and it’s crucial to design the plan correctly from day one.
For some business owners, the juice may not be worth the squeeze. But for others — especially those with six-figure federal tax bills — a well-structured cash balance plan could be transformative.