Cash Balance Plans Explained

A cash balance plan is a type of defined benefit pension plan in which each participant has a hypothetical account that grows based on employer contributions (pay credits) and a guaranteed interest credit. Unlike traditional defined benefit plans, the benefit is expressed as an account balance rather than a monthly annuity amount.

For high-income business owners and self-employed professionals, a cash balance plan paired with a 401(k) can significantly increase the amount that can be contributed on a pre-tax basis relative to a 401(k) alone. Contribution limits depend on age and are determined by actuarial calculations.

For educational purposes. Contribution limits and plan rules are subject to change. Consult a qualified plan adviser before establishing or contributing to any retirement plan.