How a Cash Balance Plan Can Add a Six-Figure Deduction After You've Maxed Your 401(k)

Virtus Financial Partners is an SEC-registered investment advisor that works exclusively with dental practices, and this article walks through how a cash balance plan can add a six-figure deduction on top of an already maxed 401(k).

Some of Virtus Financial Partners' most profitable dental practice owners have the same problem. The 401(k) is completely maxed out, the CPA needs to see more tax savings, and we see too much cash on hand.

It is not common, but when it happens, it is like we get to unveil a secret weapon. Potent and complex, but incredibly effective under the right circumstances to create six figures in tax savings while putting money away for retirement.

Enter the "Cash Balance Plan". I will walk you through what it is, pros, cons, and some general info.

What is a cash balance plan?

A cash balance plan is a defined benefit plan that sits on top of your 401(k). It credits each participant a stated benefit under a set formula and funds much like a pre-funded pension account.

You are not choosing investments inside it the way you do in a 401(k). The plan targets a benefit, and the practice funds toward that target each year.

Why does the contribution grow with age?

The reason a cash balance plan is so powerful in your peak earning years comes down to time. The plan funds a benefit you will collect at retirement, and the fewer years you have left to fund it, the more you are allowed to set aside now to get there.

An owner in their fifties can often contribute more than a younger one, so the plan gets more powerful with age.

Fit still comes down to income, excess cash, and staff demographics, and age mainly sets how much room you have. A younger high earner with steady excess cash can still be a strong candidate.

Your 401(k) works differently. Getting older there only adds a modest catch-up contribution, a few thousand dollars a year. In a cash balance plan, age raises the entire ceiling, and the annual maximum roughly doubles between age 45 and age 60.

How does it stack on your 401(k)?

A cash balance plan layers on top of your 401(k). Your Safe Harbor and profit sharing 401(k) stays the base, and the cash balance plan sits above it as a second tier.

The two are designed together so the combined contributions work under the rules and the split between you and your staff stays where it should. For most owners this means the plan you already have keeps doing its job, and the cash balance layer is what lets you shelter the larger dollars your practice now generates.

How is the money invested?

A cash balance plan's investing looks nothing like your 401(k). There is no menu of funds and no individual account for each person to manage.

Every contribution goes into one pooled account for the whole plan, professionally managed as a single portfolio.

The plans Virtus Financial Partners typically designs are variable cash balance plans. Instead of promising a fixed rate, each participant's account is credited with what the pooled portfolio earns, which helps keep the plan's funding stable because the benefits move with the investments.

There is one guardrail. By law, a participant's account can never end up below the total of the contributions credited to it, so the practice still carries some risk in a prolonged down market.

Virtus Financial Partners manages that pooled account as a conservative allocation designed to work with the funding assumption the plan's actuary sets each year, commonly in the 4% to 5% range. That range is the actuary's funding assumption for the plan, not a return Virtus targets or guarantees, and actual results will vary.

The plan's job is steady progress toward the benefit.

When does a cash balance plan make sense?

It tends to be a fit when most of these are true.

• Your 401(k) is already optimized with Safe Harbor and profit sharing
• You are already contributing the full combined limit each year
• Your practice generates excess cash, often $100,000 to $250,000 a year, that you want to shelter from taxes
• Your personal lifestyle leaves excess cash available for the funding
• Your staff size and ages make the required employer contribution workable
• You are comfortable funding the plan for several years, and ideally longer

When is it not the right move?

Just as important is knowing when to pass. It is usually not the right move in these cases.

• You are early in your career, or your income has not yet outgrown the 401(k)
• Your practice cash flow swings year to year, which makes a required contribution risky
• You have a large, older, or fast-growing staff, which drives the employer cost up
• You are not yet maxing your 401(k), which is the base to optimize first
• You cannot commit to funding the plan for several years

What could this look like for a practice owner?

Consider a hypothetical example. Dr. John owns a single-doctor practice and turns 50 this year, with a W-2 set at $360,000 and several staff.

He has maxed his 401(k) for years and now generates more income than the 401(k) can shelter on its own.

With a cash balance layer added for 2026, here is what a design like his could look like.

Hypothetical illustration, not an actual client result. Full assumptions and important details are in the note at the end of this article.

Most of the benefit flows to Dr. John as the owner, and designed within the IRS deduction limits, the employer contribution he funds, staff share included, is deductible to the practice.

Why is the deduction worth more now?

There is a second layer to the tax savings that one-year numbers do not show. Contributions come off the top of your income in your highest-bracket years, at 37% for many owners.

Withdrawals come out in retirement, when your income and often your bracket are lower.

If that holds, the spread between the two rates is savings rather than deferral, though it depends on future tax rates and your own retirement picture, which is part of the planning work.

What does a cash balance plan require?

A cash balance plan asks more of you than a 401(k), including annual actuarial and administration costs the 401(k) alone does not carry.

The contribution is set each year by the plan's actuary, and while a good design leaves some room in the target rather than one locked number, the IRS expects a plan like this to be a permanent program.

The rules do not name a minimum number of years, but a plan shut down after only a few, without a legitimate business reason, can have its qualified status questioned.

So go in planning to fund it consistently, most practitioners suggest at least three to five years, and ideally much longer, which is why it works best when your cash flow is steady.

It also takes a coordinated team, your advisor, third-party administrator, and CPA, to fit the design to your income, your staff, and your personal financial plan.

Whether it fits your situation is worth working through with your tax and retirement plan advisors.

How does a cash balance plan end?

A cash balance plan is not meant to run forever. The IRS caps what one person can accumulate, around $3.7 million in 2026 depending on age and the plan's assumptions, and reaching the full cap takes about ten years in the plan.

That is why most owners fund one hard for about a decade and then wind it down.

When you reach that point, the plan can be terminated without giving up the tax benefit. If you still own the practice, your balance typically rolls tax-deferred into your 401(k), and the money keeps compounding. If you are selling or retiring, it can roll to an IRA the same way.

Either way, the deduction happened in your highest-earning years, and the tax deferral survives the plan.

Putting it into practice

• Your optimized 401(k) stays the base, and cash balance adds a second layer on top
• The fit turns on income, excess cash, and staff demographics, and the older you are the more room it gives you
• If you are maxing your 401(k) and still writing large tax checks, it is worth a conversation

Although it is a complex tool, if the criteria line up it is well worth working through for a practice owner.

Max the 401(k) first, add the cash balance layer when the excess cash is real, fund it hard through your peak years, and roll it into your 401(k) or IRA when the job is done.

Not many strategies let you save six figures in taxes while paying yourself, and that is what makes the cash balance plan the closest thing we have to a secret weapon.

About this example

Hypothetical illustration, not an actual client result. The cash balance figure is a single-year 2026 design based on his age, $360,000 W-2, staff, and the actuary's funding assumption. It is not a targeted or projected investment return. Tax savings assume a 37% marginal tax rate. At his income the age-50 catch-up must be made as Roth in 2026, so it is not counted in the tax savings. When a cash balance plan is added, IRS combined-plan deduction limits trim the profit sharing side of the 401(k), which is why this design shows $55,250 in the 401(k) rather than the roughly $72,000 a standalone 401(k) allows. This combined-plan deduction interaction applies to small, PBGC-exempt plans such as a single-owner practice; a PBGC-covered plan is not subject to it. Your results will depend on your practice, including your staff's size and ages.