Cash Balance Defined Benefit Plan: A retirement plan that could help quickly grow a business owners wealth. 

Thomas M. Dowling CFA, CFP®, CIMA® |


A select group of entrepreneurs are taking advantage of a more sophisticated retirement solution that most business owners are unaware of, let alone, benefiting from. 

A “typical” retirement plan may not serve business owners’ best financial interests. 

Sophisticated retirement solutions such as Cash Balance defined benefit plans may enable business owners to make sizable contributions and receive large tax deductions.

Many business owners have a retirement plan called a Defined Contribution Plan, such as a 401k because they have become a popular way for people to help save for retirement. The tax benefits employees and/or business owners enjoy when participating in the plans, by utilizing the ability to defer taxes while your income is high and pay the taxes in retirement when theoretically income is lower, can be a great way to save for retirement because you contribute pretax dollars and then pay the tax as you withdraw the funds. 

However, business owners are a unique group with unique needs. We find business owners are not utilizing retirement plans as effectively as they could. 

The issue for the business owner is the ‘typical’ retirement plan is mainly for the employees and it limits the amount of money that an owner can contribute. This can be a problem when you are starting your retirement savings a little later in life. 

One of the unique aspects of a business owner, we find, is that while their business is growing, they are often using all available excess cash to fund the growth of the business. As the business finally gets to a point where it is producing significant amounts of cash flow, the business owner could be in his or her 40’s or 50’s or maybe even 60’s. At that point they have a lot of catching up to do for their eventual retirement. 

There is a certain type of retirement plan that has been around longer than 401k and can help the business owner solve this problem but is not frequently utilized. It is called a Cash Balance Defined Benefit plan. 

Defined Benefit Plans were common years ago but have fallen out of favor with large corporations. However, the Cash Balance Plan version may be more beneficial and popular for one select group and that is small businesses, such as a family-run business, that generate good revenue and have relatively few employees.

Cash Balance Defined Benefit Plans have similar characteristics to Defined Contribution Plans such as, contributions are tax deductible and will not generate income tax until the funds are withdrawn from the plan. However, a big difference with a Cash Balance Plan, as opposed to a ‘typical’ retirement plan, is that a Cash Balance Plan allows you to contribute much larger sums of money annually. These Plans allow for large contributions for the owner/employee of up to $300,000 depending on factors such as income and age. That is a lot more than the $57K max (as of 2020) allowed in s a 401k plan. The employer/owner gets the deduction, and the employee/owner does not pay income tax until the money is withdrawn at retirement. Therefore, saving current tax and helping to catch up on funding his or her inevitable retirement. 

Additionally, if you combine a 401k and Cash Balance Plan Defined Benefit Plan it can allow for even larger contributions. 

As you can see in the attached link by The Washington Post titled ‘How Jeb Bush’s firm made him rich – and created a nest egg for his family,’ Jeb Bush, the former Florida governor, turned speaker/consultant used this sophisticated retirement strategy to acquire wealth for him and his family. 

After leaving the governorship, Jeb Bush started a consulting firm with his wife and son where the firm contributed almost $2.5M to retirement plans. A large share went into a Defined Benefit Plan for just two employees.  

It appears to me that business owners may not be utilizing the advantages of a Cash Balance Defined Benefit Plan because they have not been educated enough about the plan to allow them to determine whether it is appropriate for them. 

As with all Advanced Planning Solutions, it is important to understand the benefits and drawbacks for your particular circumstances, therefore, we advise to contact your Financial Advisor to see if this type of plan would be right for you. 

Brokerage and investment advisory accounts, are offered through Alliance Global Partners, a member of FINRA and SIPC.  

The opinions expressed and material provided are for information purposes only and is not an offer, recommendation, or solicitation of any product, strategy, or transaction. Any views, strategies or products discussed may not be appropriate or suitable for all individuals and are subject to risks.  Prior to making any investment or financial decision, a person should seek advice from a financial, legal, tax and other professional that consider all the particular facts and circumstances of the person’s own situation.  Alliance Global Partners does not provide tax or legal advice.

The opinions expressed are for information purposes only and is not an offer, recommendation, or solicitation of any product, strategy, or transaction.  The views, strategies or products discussed may not be appropriate or suitable and may be subject to risk.