WSJ Article Reaction Cash Balance Plans - The Retirement Savings Weapon Doctors and Lawyers Use to Build Wealth

WSJ Article Shows A Lot of Opportunity for Business Owners to Save More for Retirement

On March 8th of this year, the Wall Street Journal published an article entitled "The Retirement Savings Weapons Doctors and Lawyers Use to Build Wealth". The article talked about a type of employer sponsored retirement plan known as a Cash Balance Plan. The article was so impactful that just a few days later, the WSJ had to release a follow up article providing more details on how to set one of these plans up. Here are the details on how these Plans work and why they might be a good fit for your business.

Set Up A Meeting To Discuss Cash Balance Plans

For business owners, building wealth while minimizing taxes is a constant balancing act. Traditional retirement plans like 401(k)s offer a solid start, but their contribution limits—$23,000 in 2025, plus a $7,500 catch-up for those over 50—often fall short for high earners looking to sock away more. Enter the cash balance plan, a powerful yet underutilized tool that blends the best of defined benefit pensions with modern flexibility. These plans allow business owners to turbocharge retirement savings, slash taxable income, and secure their financial future. Here’s how they work and why they’re a game-changer for wealth-building entrepreneurs.

What Is a Cash Balance Plan?

A cash balance plan is a type of defined benefit retirement plan with a twist. Unlike traditional pensions that promise a set monthly payout at retirement, cash balance plans define the benefit as a lump-sum account balance—think of it as a pension with a 401(k)-style wrapper. Each year, the employer (you, the business owner) contributes a set amount to each participant’s “account,” plus a guaranteed interest credit (often 4-5% or tied to Treasury rates). At retirement, participants can take the balance as a lump sum or convert it to an annuity for lifetime income.

The magic lies in the contribution limits: in 2025, depending on age and plan design, owners can stash away $150,000 to $350,000 annually—far exceeding 401(k) or SEP-IRA caps. For a 50-year-old, that could mean $275,000 per year, dwarfing the $69,000 max of a 401(k) with profit sharing.

How Cash Balance Plans Work

Here’s the mechanics in action:

1. Annual Contributions: As the employer, you commit to funding the plan each year. For yourself and employees, contributions are calculated by an actuary based on age, salary, and years to retirement. Older owners get higher contributions since they have less time to build the benefit.

2. Interest Credits: The plan credits a fixed or market-based return—say, 5%—ensuring steady growth. This isn’t tied to actual investments; it’s a promise you back with plan assets.

3. Investment Pool: Contributions are pooled and invested by a plan trustee (often you or a professional manager) in a mix of stocks, bonds, or conservative funds. The goal? Outpace the interest credit to keep the plan funded without extra cost.

4. Retirement Payout: At retirement (typically 65, but flexible), the accumulated balance—contributions plus interest credits—is available as a lump sum or annuity. IRS rules cap the total benefit at around $3.8 million in 2025, indexed annually.

For example, a 55-year-old owner contributes $300,000 yearly. Over 10 years, with 5% interest credits, their account grows to over $4 million (capped at the IRS limit). That’s tax-deferred growth on steroids.

How They Help Build Wealth

Cash balance plans supercharge wealth-building in three key ways:

• Massive Contributions: A 45-year-old owner contributing $200,000 annually for 20 years, with 5% credits, could amass $6.6 million (before the cap). Compare that to a 401(k)’s $30,500 limit—over 10 years, it’s just $305,000 pre-growth. The sheer scale accelerates savings.

• Tax-Deferred Growth: Contributions grow tax-free inside the plan. That $200,000 invested outside might face 20-30% in taxes annually on gains; here, it compounds untouched until withdrawal.

• Flexibility: At retirement, roll the lump sum into an IRA for continued tax deferral or use it to fund a business venture, real estate, or legacy planning. It’s your money, your call.

  
  

How They Lower Taxes

The tax advantages are where cash balance plans shine for business owners:

• Immediate Deduction: Contributions are tax-deductible as a business expense. Put in $250,000? Your taxable income drops by $250,000 that year. For a 37% tax bracket owner, that’s $92,500 in federal tax savings annually—money you keep instead of sending to the IRS.

• Shield High Income: If your business nets $500,000 yearly, a $200,000 contribution cuts taxable income to $300,000, slashing your tax bill by tens of thousands. Pair it with a 401(k) for even more relief—up to $269,000 total deduction in 2025 for a 50-year-old.

• Catch-Up Power: Older owners (50+) get higher contribution limits, amplifying deductions as income often peaks. A 60-year-old might deduct $350,000, turning a big tax liability into a retirement windfall.

  
  

Real-World Example

Take Maria, a 52-year-old dentist with a thriving practice earning $600,000 annually. She maxes her 401(k) at $69,000 but wants more. She sets up a cash balance plan, contributing $250,000 for herself and $20,000 total for two employees. Her taxable income drops from $600,000 to $330,000, saving her $99,900 in taxes (37% bracket). Over 13 years, her $250,000 yearly contributions, with 5% credits, grow to $4.5 million (capped at $3.8 million). She retires at 65 with a tax-sheltered fortune, while her employees gain a solid benefit too.

Who Benefits Most?

Cash balance plans favor:

• High-Earning Owners: Doctors, lawyers, consultants, or small firm owners with $200,000+ in profits.

• Older Entrepreneurs: Age 45-65, where higher contributions maximize tax and savings benefits.

• Small Businesses: Firms with few employees (5-15) keep costs manageable—employee contributions are required but can be modest (e.g., 5-7.5% of pay).

  
  

Considerations

• Cost: There is usually a Setup Fee of around $3,000 and annual Actuarial Expense of around $2,000, but this can be lower depending on the solution chosen.

• Commitment: Contributions are mandatory—miss one, and penalties loom. It’s for stable businesses.

• Employee Inclusion: You must fund staff, but smart design keeps their share low while maximizing yours.

  
  

Why Now?

With 2025’s higher interest rates boosting guaranteed returns and market volatility (think 2022’s 20% drop) threatening traditional portfolios, cash balance plans offer stability and tax relief when it’s needed most. They’re a wealth-building turbocharger for owners who’ve outgrown 401(k)s.

Getting Started

Consult a fiduciary advisor or firm like Legacy Strong, experts in retirement plan design. They’ll crunch the numbers—your age, income, staff size—and craft a plan that fits. In a few weeks, you could be piling up tax-deferred wealth while cutting this year’s tax bill. For business owners, cash balance plans aren’t just a retirement tool—they’re a wealth and tax strategy rolled into one.