A 401(k) is a good start, but for many high-income practice owners it leaves a large amount of potential tax-deferred saving on the table. That’s where a cash balance plan can come in.
What is a cash balance plan?
A cash balance plan is a type of defined-benefit retirement plan. Unlike a 401(k), where you contribute a set amount, a defined-benefit plan is built around a targeted benefit, and contributions are calculated (by an actuary) to fund it. Layered on top of a 401(k) and profit-sharing plan, it can allow substantially larger tax-deferred contributions.
Who is a cash balance plan best for?
- High-income practice owners who are already maxing a 401(k).
- Owners who are older than most of their staff (which affects the math favorably).
- Owners with consistent profits who can commit to required contributions.
- Those who want to accelerate retirement saving and defer significant taxes.
How much more can you contribute?
Contribution limits for defined-benefit plans are based on age, income, and the targeted benefit, and can be several times a 401(k) limit for an older, high-income owner. Because the numbers are individualized, the only way to know your figure is to have it modeled. See how it compares with other plans in retirement plans for dental practices compared.
What are the trade-offs?
- Contributions are largely required, not optional, once the plan is set.
- Staff must generally receive a contribution, which is a real cost.
- The plan needs actuarial administration and ongoing compliance.
- It works best with stable, predictable profits.
Frequently asked questions
It depends on age, income, and the plan’s design, and can substantially exceed 401(k) limits for an older, high-income owner. The figure is individualized and should be modeled.
Generally yes. Defined-benefit and pairing plans require contributions for eligible employees, which is a real cost to weigh against the owner’s tax deferral.
Yes — they’re commonly paired. The 401(k)/profit-sharing plan and the cash balance plan work together to maximize tax-advantaged saving.
Founder & Financial Planner · Investment Adviser Representative · Series 63 & 65
Ian McGinnis is the founder of Dental Wealth Partners and a fee-only financial planner dedicated to dentists. As an investment adviser representative (Series 63 and 65), he built the firm to give dentists coordinated, fiduciary advice across their practice, taxes, investments, retirement plans, and long-term goals — the whole picture in one strategy. A graduate of Belhaven University, Ian previously worked at Davis Private Wealth, MML Investors Services, and Northwestern Mutual, and is based in the Jackson, Mississippi area. He is the author of The Wealthy Dentist and hosts the Smiles & Cents podcast.
Keep reading
- Retirement plans for dental practices, comparedA comparison of 401(k), safe harbor, profit sharing, SEP-IRA, and cash balance plans for dental practice owners — and how to choose.
- Tax planning strategies for dental practice ownersProactive, year-round tax strategies for dental practice owners — entity choice, retirement plans, income timing, and coordinating with your CPA.