I am a fan of cash balance plans. Who would not want another $200,000 a year of tax-deferred space stacked on top of a maxed-out solo 401(k)? But nearly every article written about them is written by someone who sells them, and the part that gets skipped is the least glamorous part: whether you can actually feed the thing for five straight years.
The question came from an anesthesiologist doing locums work through an S-corp, grossing around $650,000 a year, already maxing a solo 401(k), and trying to decide whether a cash balance plan is worth the added complexity. He is right at the income where these start to make sense. He may also be right at the income where they do not, and the difference comes down to arithmetic he can do this afternoon.
Run the Numbers Before the Sales Pitch
Start at $650,000 gross. Take off roughly half for federal, state, and self-employment taxes, which lands near $325,000. Call it an even $300,000, because self-employment tax is unkind at this income. Then subtract the solo 401(k). At roughly $70,000, that leaves about $230,000. Round up to $240,000, or $20,000 a month to actually live on.
That number decides this. If you are spending meaningfully less than $20,000 a month, a cash balance plan has room to work. If you are spending anywhere near it, you do not have $200,000 to put anywhere, no matter how good the deduction looks on paper.
What the Deferral Actually Costs
It helps to be precise about the trade. Contributing $200,000 might save you something like $70,000 in current taxes. That is real money and worth having. But you are still parting with about $130,000 of spendable net worth, and you are parting with it every year the plan stays open.
Tax-deferred is also not tax-free. You are moving the bill, not erasing it. At a 50% effective rate that is usually a good move, but it is a trade rather than a gift, and treating it as free money is how people talk themselves into a plan they cannot sustain.
A Pension Is Not a Bigger 401(k)
A cash balance plan is an actuarial pension, and that word carries consequences. There is genuine paperwork, real administrative cost, and ongoing plan review for the life of the plan. A solo 401(k) gets set up once and then largely ignored. This is not that. You check a box for one; you hire people for the other.
The overhead drags on the tax savings, so the net benefit is always smaller than the headline. More importantly, funding is not as optional as people assume. If your income dips and you cannot contribute, you are not simply skipping a year. You may be out of compliance on a pension plan, which is a much more expensive problem than the deduction was ever worth.
Most of the plans we see stay open three to five years, then get shut down, with the balance rolled into an IRA. That is a perfectly good outcome. But it means the real question is whether you can commit across that entire window, not whether the idea appeals to you this year.
Build the Brokerage Account First
Here is the part that sounds odd coming from someone who likes these plans. Before you open one, go look at your taxable brokerage account.
The failure I want to help you avoid is having an impressive net worth and no access to any of it. Every dollar inside a 401(k) or a pension is locked up until 59 and a half. If your entire balance sheet sits behind that wall, you have optimized your tax return and quietly wrecked your flexibility. You want degrees of freedom in your financial life, and the brokerage account is where they live.
At $650,000 of income with roughly $200,000 of spending, I would want to see somewhere between $250,000 and $500,000 in a brokerage account before locking away anything more. The tax argument against holding money there is also weaker than people assume. You probably will not spend much of it, which means it compounds at capital gains rates and eventually receives a step-up in basis for your heirs.
My Breakeven Is a Hundred Thousand a Year
If you can consistently save $100,000 or more annually beyond the 401(k), a cash balance plan is close to a slam dunk. Below that, I have a hard time justifying the actuarial fees, the administration, and the compliance exposure. If the honest number is $50,000, build the brokerage account instead and revisit this later.
So the sequence I would follow looks like this. First, confirm you have real liquidity outside retirement accounts. Second, confirm the $200,000 is genuinely available rather than theoretically available. Third, confirm you can repeat it for three to five years. If all three are yes, open the plan and enjoy it. If any of them is a maybe, stay flexible for another year and work through the cash flow picture with us, your advisors, before adding a pension to your life.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on when a cash balance plan earns its complexity, listen to the full podcast episode here.