How it Works

Cash balance plans offer owner-employees in professional practices a vehicle to defer tax on income more than the annual contribution limits of traditional Sec. 401(k) and profit sharing plans. Professional practices currently account for the highest use of cash balance plans, with the highest concentration in the medical field. Cash balance plans are appealing to this demographic of doctors, dentists, lawyers, and accountants because these professionals often larger annual salaries and get a later start in accumulating personal retirement savings.


One valuable method of tax deferral is contributing to a retirement plan. Federal tax limits on contributions to Sec. 401(k) and profit sharing plans limit benefits that can be realized from this tax-planning strategy. The maximum contribution into defined contribution plans is $54,000 in 2017.

Since cash balance plans are considered defined benefit plans contributions are not subject to this federal tax limit. The limitation on cash balance plans is on the annual payout the plan participant may receive at retirement. To optimize tax deferral and retirement savings, a cash balance plan can be used in conjunction with a Sec. 401(k) plan and a profit sharing plan.

Additional Benefits

Cash balance plans offer the added benefit of allowing the taxpayer to make significant retirement contributions over a compressed period.

Important Considerations

Owner-employees of professional practices can realize significant tax savings by using a cash balance plan but should undertake a comprehensive retirement and business analysis with a top-tier firm like Camuso CPA to determine whether it is appropriate for them.

Entities with established cash balance plans must pay into them every year, so cash balance plans are more suitable for established practices with a steady cash flow.

Although the annual pay-in does not have to equal the sum of the principal credits, the business must still meet the same minimum funding requirements as other defined benefit plans.

Cash benefit plans can also be costly to administer since businesses bear the costs of working with actuaries to determine pay-in amounts in addition to costs of general fund management.

When establishing a cash balance plan, it is also important to consider the effect of participation by non-owner employees during financial planning.

Consult with a trusted CPA before executing investment decisions or initiating any substantial changes to your retirement and investment plans. CPAs know your finances better than any other advisor and should have the expertise and network to offer valuable, preemptive recommendations. Investors and business owners of all types should look for an advisor that serves as a partner; an ideal CPA is a financial expert with companies within your industry that can provide ongoing financial and business advice when you need it most.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients. Contact us today for financial and tax planning and get your finances in order: