How Is A Cash Balance Plan Taxed?

How Is A Cash Balance Plan Taxed?

November 02, 2020

Cash balance plans are growing in popularity, especially among small businesses with high earners, like medical offices or legal firms. Two of the things that make cash balance plans so appealing are their high contribution limits and tax advantages. As such, today we will look at how cash balance plans are taxed and some of the related advantages.

Tax-Free Contributions

One of the greatest benefits to businesses is that contributions to a cash balance plan qualify for an above-the-line deduction. That means that all contributions reduce the business’s taxable income dollar-for-dollar. Such deductions are getting harder and harder to find, so this is one that your clients will want to take advantage of. Cash balance plans, with their significantly higher contribution limits, allow for greater taxable income reductions than most other qualified plans. 

Reducing taxable income means that the business will have a lower tax bill. That’s always a desirable outcome. However, with the new qualified business income deduction, it could become even more valuable. For specified service businesses with an income close to the phaseout, it could mean the difference between qualifying for the 20% qualified business income deduction and not. Utilizing cash balance plan contributions to lower taxable income below the phaseout threshold and take advantage of the 20% deduction can lower a business’s tax bill in two distinct and powerful ways.

Tax-Deferred Growth

Like many other qualified plans, cash balance plans enjoy the benefit of tax-deferred growth. Contributions are made to the plan and allowed to grow tax-free until withdrawal. This is a significant advantage over taxable brokerage accounts, which is where many end up saving for retirement after maxing out IRAs and qualified plans with lower contribution limits.

Withdrawal Options 

Withdrawals from cash balance plans are subject to regular income tax. However, available withdrawal options allow for flexibility in the timing of the taxable income. Most plans provide for annuitization at retirement or a lump-sum payment that can be rolled into an IRA. Choosing a lump sum and rolling it into an IRA allows the account owner control over the timing and amounts of withdrawals. Having this flexibility makes room for minimizing tax liability in retirement through strategic withdrawals. 

How I Can Help

Sponsoring a cash balance plan can be a powerful tax strategy for high-income business owners, especially those playing catch-up on their retirement savings. However, like most qualified plans, they are not simple. Their complexity requires a certain level of expertise, especially since they are subject to ERISA law. 

Most financial advisors do not have the depth of knowledge to set up an ideal plan for their clients and neither do they have the desire to develop that knowledge. That is where I enter the picture. As a pension consultant, I partner with financial advisors like yourself to help their clients design and administer retirement plans like the cash balance plan. I do not try to take over client relationships; I’m simply a member of the team focused on the retirement plan itself. To learn more about how we can partner together to serve your clients, email me today at

About Kenny Phan

Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.