Drawdown Sequencing: Considerations to Smarter Retirement Withdrawals

What is a cash balance plan?

A cash balance plan is an employer-funded retirement plan that combines features of a traditional pension and a 401(k). Technically, it’s a defined benefit pension plan. But instead of expressing your benefit as a monthly pension payment, it shows a hypothetical account balance.¹

Each year, that balance receives two types of credits:

• Pay credits: An amount determined by the plan’s formula, often based on compensation.
• Interest credits: Growth calculated using a rate or index specified in the plan.¹

Unlike a 401(k), you don’t choose your own investments in your individual cash balance account. Instead, the employer funds the plan and chooses where the money goes. When you retire or leave the business, you may be able to take your accrued benefit and roll it into an IRA, depending on the plan’s terms.¹

How much can you contribute to a cash balance plan?

Cash balance contributions are based on your age, income, and the retirement benefit your plan is designed to provide. They’re not fixed limits like with a 401(k). Generally, the closer you are to retirement, the more you can contribute because you have fewer years to fund that benefit.²

For example, say you’re a 55-year-old physician earning $800,000 a year from your medical practice. In 2026, you could potentially contribute:

• $72,000 to a 401(k) or profit-sharing plan through combined employee and employer contributions.³
• $8,000 in additional catch-up contributions.³
• $200,000 to a cash balance plan, assuming the plan’s design and funding calculations allow it.²

Note: These cash balance plan contribution limits are hypothetical only. An actuary determines how much your business can contribute based on the plan’s benefit formula and applicable limits.²

Under this hypothetical example, you could contribute $280,000 in retirement contributions in a single year, compared with $80,000 through the 401(k) alone.

Plus, employer contributions to a cash balance plan could be tax-deductible.⁴ So, that additional $200,000 contribution might also reduce taxable income by $200,000.

Cash balance plan vs. 401(k): Can you have both?

Pairing a cash balance plan with a 401(k) or profit-sharing plan is one of the most common ways high-earning business owners maximize retirement savings. But there are a few things to consider before offering both.

If your business has employees, both plans must meet IRS coverage and nondiscrimination requirements. In other words, you may need to contribute to your employees' retirement accounts, too.⁵

You’ll also need an actuary to calculate the cash balance plan’s funding requirements, plus ongoing plan administration.² And while you can contribute to both plans, special IRS rules may limit how much your business can deduct. Your actuary and tax advisor can help you determine appropriate contribution amounts and stay within IRS requirements.⁴

Is a cash balance plan right for your business?

A cash balance plan may be worth considering if you’re a high-earning business owner in your late 40s to early 60s who wants to save more for retirement than a typical 401(k) allows.

Specifically, cash balance plans tend to work especially well for:

• Physicians, attorneys, and consultants who earn consistently high incomes and want to make larger retirement contributions during their peak earning years.
• Solo practitioners and small partnerships with few or no employees, since they may have fewer employee retirement benefits to fund.
• Business owners with predictable profits who can comfortably afford the plan’s ongoing contributions, even when unexpected expenses come up.

That said, a cash balance plan might not be the best fit if your business has unpredictable revenue or a large number of employees. The required contributions and administrative costs could eat into the tax savings you’re hoping to achieve.

Younger business owners may also find that a solo 401(k), SEP retirement plan, or traditional 401(k) provides enough room to save for retirement without the added costs and complexity.

How cash balance plans reduce taxes and build retirement savings

One of the biggest perks of a cash balance plan is that employer contributions are generally tax-deductible, reducing your taxable income today while your retirement savings grow tax-deferred.⁴

Let’s go back to our physician example. If the practice contributes $200,000 to a cash balance plan and qualifies for the full deduction, that could reduce its taxable income by $200,000. At an assumed combined federal and state marginal tax rate of 42%, that’s potentially $84,000 in current-year tax savings. (Actual savings depend on your business structure, tax bracket, and applicable deduction limits.)

You’ll generally pay ordinary income taxes when you withdraw the money in retirement. But if you’re in a lower tax bracket by then, you could pay less in taxes overall.

You may also be able to roll your cash balance plan savings into a traditional IRA when you retire without triggering immediate taxes. From there, you could convert some of that money to a Roth IRA during lower-income years. You’d generally owe taxes on the amount converted, but qualified Roth withdrawals would be tax-free.⁶

Why insurance matters when funding a cash balance plan

If you’re counting on business income to fund a cash balance plan, different types of insurance coverage could help protect your business and family if something unexpected happens.

For instance:

• Disability insurance could replace a portion of your income if an illness or injury prevents you from working. This can help you cover living expenses without dipping into your retirement savings.
• Key person life insurance could provide your business with funds if you or another essential employee dies. The money could help cover operating expenses, hire a replacement, or keep the business running during the transition.
• Personal life insurance can provide your family with financial support if you die. These funds can also help them cover expenses and protect the retirement savings you’ve worked to build.

Keep in mind that insurance doesn't replace your business's obligation to fund its cash balance plan. You'll still need to meet the plan's funding requirements, even if your business faces an unexpected setback.

Frequently asked questions