Business owners over 50 can combine cash balance plans with 401(k)s to deduct up to $300,000 annually from taxable income.
A tax strategy combining cash balance plans with 401(k)s allows business owners aged 50 and above to shelter up to $300,000 from federal taxes in a single year. Contribution limits rise with age, reaching $200,000 at 55 and $260,000 at 60, according to IRS rules for defined benefit plans.
The approach requires adopting the plan by December 31 and mandates contributions for eligible employees, typically 5-8% of pay. A 58-year-old orthodontist earning $700,000 annually can deduct an additional $150,000 to $250,000 beyond the $72,000 401(k) limit, reducing taxable income significantly.
Cash balance plans are treated as defined benefit plans by the IRS, with funding limits scaling based on years until retirement. The strategy remains underutilized despite its potential to cut six-figure tax bills for high earners.