Cash Balance Plans for Doctors: How to Deduct $200K+ in Retirement Contributions

By Brian Giesecke, CPA/EA | Giesecke Advisory

What if I told you there's a way to shelter $200,000... even $300,000 a year from taxes -- and build a massive retirement account at the same time?

For most medical practice owners, that sounds too good to be true. But for the right person, a cash balance plan makes it very real.

I'm Brian -- CPA, Enrolled Agent, and I run a dermatology practice day-to-day. Cash balance plans are probably the most powerful tax reduction tool I've seen for high-earning practice owners. But they're also the most misunderstood.

So let's break it down. What a cash balance plan actually is, who should consider one, how much you can contribute, the real downsides... and a specific example from a dermatologist who's saving roughly $100,000 a year in taxes because of this strategy.

What Is a Cash Balance Plan?

A cash balance plan is a type of defined benefit pension plan. If that sounds old-school, you're not wrong -- it's built on the same IRS framework as traditional pensions. But the way it works feels much more modern.

Instead of promising you a monthly payment for life (like your grandfather's pension), a cash balance plan shows you a "cash balance." Think of it as an account balance that grows each year with two components:

• A pay credit -- your annual contribution
• An interest credit -- a guaranteed growth rate, usually around 5-6%

Here's what matters most: those contributions are fully tax-deductible. Every dollar you put into the plan is a dollar you don't pay income tax on this year.

So if your actuary determines you can contribute $200,000 to a cash balance plan... that's $200,000 off your taxable income. At a combined federal and state rate of 40%, that's $80,000 back in your pocket.

The contributions aren't arbitrary, though. They're determined by an actuary based on your age, your target retirement benefit, and IRS limits. This is a professionally managed, IRS-compliant retirement vehicle -- not something you set up yourself at Fidelity on a Saturday morning.

Cash Balance Plan Contribution Limits by Age

This is where it gets interesting. The contribution limits for a cash balance plan are dramatically higher than what you're used to with a 401(k) or SEP-IRA.

And they depend heavily on your age. The older you are, the more you can contribute -- because you have fewer years to accumulate the target retirement benefit.

Here are some rough annual contribution ranges:

• In your 40s: $100,000 - $150,000 per year
• In your 50s: $150,000 - $250,000 per year
• In your 60s: $200,000 - $300,000+ per year

Compare that to a Solo 401(k), which maxes out around $69,000. Or a SEP-IRA, which caps at roughly $66,000.

The gap is enormous.

And here's the part that most practice owners don't realize: you can have both. A cash balance plan combined with a 401(k). So you might contribute $69,000 to your 401(k) PLUS $200,000 to your cash balance plan. That's $269,000 in total tax-deferred retirement savings in a single year.

For a high earner in a top bracket, that kind of combined strategy can cut your tax bill by six figures -- every year.

Who Should Consider a Cash Balance Plan?

Cash balance plans aren't for everyone. They make the most sense when a few specific things are true about your situation.

You're a high earner. If your practice is generating $300,000 or more in profit and you've already maxed out your 401(k), this is the natural next step. The tax savings at this income level are substantial.

You're in your peak earning years. The math works best when you're in a high bracket now and expect to be in a lower bracket in retirement. That's the classic arbitrage -- deduct at 40%, withdraw later at 22%.

You can commit to consistent contributions. This is important, and I'll be straight with you about it. Cash balance plans require multi-year commitments. You can't just contribute one year and skip the next. The IRS and your actuary expect consistency.

You're willing to pay for professional administration. These plans require an actuary for annual actuarial certification, a third-party administrator (TPA), and annual IRS filings. Figure $2,000 to $5,000 per year in fees. But when you're saving $50,000 to $100,000+ in taxes, the return on that investment is obvious.

If you're an independent medical practice owner -- especially in a specialty like dermatology, ophthalmology, or orthopedics -- with strong, consistent profits, you're exactly who this strategy was designed for.

The Real Downsides of Cash Balance Plans

Let's be honest about the trade-offs. No strategy is perfect, and I'd rather you go in with clear eyes.

Cost and complexity. Setting up a cash balance plan involves legal documents, actuarial calculations, and ongoing compliance. You need professionals. This isn't a DIY project, and the setup costs typically run $2,000 to $5,000, with similar annual maintenance fees.

The commitment factor. Once you establish a defined benefit plan like this, you're expected to fund it every year. You can adjust the contribution amount somewhat, but you can't just stop contributing without consequences. If your practice has a down year, that required contribution still exists.

Employee coverage requirements. If you have W-2 employees, you'll likely need to make contributions for them too. The exact amount depends on the plan design and testing requirements, but it's a real cost. For a solo practitioner or a practice with few employees, this is manageable. For a larger staff... it can add up.

Illiquidity. The money is locked up until retirement or separation from the business. Unlike a 401(k), you can't take a loan against a cash balance plan. This is long-term money.

Exit planning matters. When you retire, sell the practice, or wind down the plan, you'll need to roll the balance into an IRA or take a distribution. There are specific IRS rules about how and when. It's not complicated, but it requires planning.

For the right person, these trade-offs are absolutely worth it. For others, they're deal-breakers. And that's okay -- knowing which camp you're in is the whole point.

Real Example: A Dermatologist Saving $100K Per Year

Let me walk you through a real scenario. Numbers adjusted slightly for privacy, but the structure is exactly what we implemented.

A dermatologist, age 52, generating $450,000 in annual practice profit. She had been using a SEP-IRA and contributing about $60,000 per year. Solid, but she knew she was leaving money on the table.

We set up a cash balance plan combined with a Solo 401(k). Here's how the numbers shook out:

• 401(k) contribution: $69,000
• Cash balance plan contribution: $180,000
• Total annual retirement contribution: $249,000

At her combined federal and state marginal tax rate of roughly 40%, her annual tax savings came to approximately $100,000 per year.

Yes, there are fees. About $4,000 annually for the actuary and TPA. But she's saving $100,000 in taxes. The math isn't even close.

And here's the long view... over ten years, she'll have sheltered roughly $2.5 million from taxes. That's not just a retirement account. That's generational wealth.

Before the cash balance plan, she was contributing $60,000 and saving about $24,000 in taxes. After? She's contributing $249,000 and saving $100,000. Same income. Same practice. Completely different financial trajectory.

Cash Balance Plan vs. 401(k): The Combined Strategy

Most practice owners I talk to are familiar with 401(k) plans. They're straightforward, well-understood, and flexible. But they have a ceiling.

For 2024, the maximum 401(k) contribution (including employer match) is around $69,000 if you're 50 or older. That's great -- but if you're earning $300,000, $400,000, or $500,000+, you're still paying full taxes on the majority of your income.

A cash balance plan removes that ceiling.

The combined strategy looks like this:

| Component | Annual Contribution | Tax Savings (40% rate) | |-----------|-------------------|----------------------| | 401(k) | $69,000 | $27,600 | | Cash Balance Plan | $150,000 - $250,000 | $60,000 - $100,000 | | Combined | $219,000 - $319,000 | $87,600 - $127,600 |

The 401(k) handles the first layer. The cash balance plan handles everything above that. Together, they create a high-earner retirement plan that most practice owners don't even know exists.

How to Know If a Cash Balance Plan Is Right for Your Practice

Here's a simple way to think about it. Ask yourself these questions:

1. Is your practice generating $300,000+ in consistent annual profit? Consistency matters because of the multi-year commitment.

2. Have you already maxed out your 401(k) or SEP-IRA? If you haven't fully utilized simpler options, start there first.

3. Are you in a top tax bracket now -- and expect to be in a lower one in retirement? That's where the real arbitrage lives.

4. Can your practice cash flow support $150,000+ in annual retirement contributions? The contributions need to come from somewhere. Make sure your operations can handle it.

5. Do you have a manageable employee headcount? Fewer employees means lower coverage costs and a cleaner plan design.

If you answered yes to most of these... it's worth a conversation with your CPA and an actuary. Even a preliminary projection can show you exactly what the numbers look like for your specific situation.

Getting Started: The First Steps

If you're seriously considering a cash balance plan for your medical practice, here's the path forward:

Step 1: Run the numbers with your CPA. Before engaging an actuary, your CPA should model out whether the contribution levels make sense given your cash flow, tax situation, and existing retirement accounts.

Step 2: Engage an actuary. The actuary designs the plan, determines your annual contribution, and provides the required actuarial certification each year. Your CPA can typically recommend one.

Step 3: Establish the plan before year-end. Cash balance plans need to be set up by December 31 of the year you want the deduction. But you often have until your tax filing deadline (including extensions) to actually fund it.

Step 4: Coordinate with your existing retirement plan. If you have a 401(k) or SEP-IRA, the cash balance plan needs to work alongside it. Plan design matters here -- get it right from the start.

The Bottom Line

Cash balance plans are complex on the administrative side. But the financial impact for high-earning practice owners is hard to ignore.

We're talking about $100,000+ per year in tax savings. Millions sheltered over a career. A retirement account that actually reflects the income you've earned.

If you're a medical practice owner earning $300,000 or more... and you're still relying on a 401(k) alone... you might be leaving the single biggest tax planning opportunity on the table.

I'd love to know -- had you heard of cash balance plans before reading this? Are you already using one? I'm always curious where people are in this journey.

If you want to see how strategies like this fit into your broader tax picture, grab our [Tax Planning Checklist](https://gieseckeadvisory.com/tax-planning-checklist) -- it walks through the key moves for practice owners step by step.