Is a Cash Balance Plan Right for You? The Pros and Cons

July 6, 2018


Cash balance plans are an increasingly popular retirement planning tool. Given their generous contribution limits, you could quickly build a sizable nest egg while reducing your income taxes. But are these plans right for you? To help you decide, we take a look at what they are, who they work best for, and their potential pros and cons.

What Is a Cash Balance Plan?

A cash balance plan is a defined-benefit plan (pension) that acts like a defined-contribution plan [401(k)]. Simply put, this means that you will receive a specific account balance when you retire. The amount is guaranteed and does not depend on investment performance.

Cash balance plans are gaining in popularity among self-employed professionals and practice owners (such as doctors and attorneys) with few employees.

Your company would set up the plan with an actuary and make annual pretax contributions. Each participant (you and your employees) will receive a specified portion of the contribution, plus a guaranteed interest credit.

The funds in your account grow tax-deferred. When you retire, you can roll the funds over into a traditional IRA, take the balance as an annuity, or receive it in cash.

Potential Advantages of a Cash Balance Plan

A cash balance plan can be a powerful retirement savings strategy. You can take advantage of:

  • Generous contribution limits: How much you can contribute will depend on your age—the older you are, the more you can contribute. The specifics will depend on your plan, but some people age 60-plus are able to contribute over $200,000 per year. The ability to contribute tens of thousands of dollars per year could help you achieve your retirement goals regardless of whether you are just starting out and perhaps thinking of retiring early, or you are midcareer and needing to catch up on your retirement savings.
  • A triple saving opportunity: Some professionals combine cash balance plans with a 401(k) and profit-sharing plan to turbocharge their savings ability.
  • Tax minimization: Not only will account funds grow tax-deferred, but the pretax contributions could reduce your income taxes. You may even be able to place yourself in a lower tax bracket.

Potential Disadvantages of a Cash Balance Plan

A cash balance plan is not for everyone. Potential cons to consider include:

  • Employee contributions: You will contribute not only toward your account but also toward your employee accounts—generally 5–8% of their salary. On the other hand, offering a cash balance plan could help you attract more high-quality employees.
  • Expenses: Cash balance plans have higher costs than 401(k) plans. Your fees will include ongoing actuary expenses, investment management fees, and administration costs.
  • Investment risk: The amount you and your employees will ultimately receive is not based on investment performance—in other words, the amount is not tied to investment risk. That means your business (i.e., you) will bear the plan’s investment risk. However, you may have few to no employees, making the bulk of contributions apportioned to you. In addition, you can adjust your annual contribution requirements to account for fluctuations in income.


A cash balance plan can provide a valuable strategy in jump-starting your retirement savings or catching up if you are behind. The plan requirements and expenses, however, may not offset the potential wealth-building and tax-saving benefits. If you have questions about whether a cash balance plan is right for you, please talk to us. We can help you make an informed decision in light of your overall situation and retirement goals.

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