Cash balance plan: worth it for a high-earning physician?

Physician finance

Usually yes, for a physician who already maxes a 401(k), is in a top tax bracket now, and expects a lower bracket in retirement. A cash balance plan can deduct six figures a year.

Usually yes, for a physician who already maxes a 401(k), is in a top tax bracket now, and expects a lower bracket in retirement. A cash balance plan lets you deduct far more than a 401(k) allows, often six figures a year depending on age. The benefit comes from the gap between your tax rate today and your rate when you withdraw. If that gap is small, or staff costs and fees are high, a taxable account can come out ahead.

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What is a cash balance plan?

A cash balance plan is a defined benefit pension that looks like a 401(k) on your statement. Each year your account gets a pay credit, a set dollar amount or percent of pay, and an interest credit, a promised rate like 4 or 5 percent, or a rate tied to a bond index. The employer, which for a partner means the practice's own money, funds the plan, and an actuary sets the required contribution every year.

Because it is a defined benefit plan, the contribution limit is not the 401(k) limit. It is built backward from the maximum annual benefit the tax code allows at retirement. That is why older physicians can put in much more than younger ones. A 60 year old has fewer years to fund the same maximum benefit, so the annual contribution needed to get there is larger. A 40 year old might be able to contribute $80,000. A 60 year old might be able to contribute $250,000 or more. The exact number depends on the plan design and the actuary's calculation.

For a partner in the top bracket, it is the biggest tax deduction left once the 401(k) is full.

How much does a cash balance plan save in taxes?

Take a 50 year old partner as a worked example. This partner is at a 42 percent combined marginal rate (37 percent federal plus 5 percent state) and has $100,000 to put toward retirement beyond a maxed 401(k).

In the cash balance plan, the full $100,000 goes in pretax. At a 5 percent interest credit for 10 years it grows to about $162,900. At retirement it is rolled to an IRA or a 401(k) and withdrawn. If the partner's retirement rate is 29 percent (24 percent federal plus 5 percent state), the after tax value is about $115,700.

In a taxable account, the same $100,000 goes in after tax, so only $58,000 is available to invest. At 7 percent for 10 years with a 2 percent qualified dividend yield taxed at 23.8 percent each year, it grows to roughly $105,000 after accounting for the annual tax drag. At the end, selling triggers capital gains tax on the growth.

The cash balance plan wins here by roughly $10,000 to $15,000 on $100,000, and the edge grows with larger contributions and bigger rate gaps. The entire advantage is the tax arbitrage: deduct at 42 percent, withdraw at 29 percent, and let the money compound pretax in between.

What does it cost to run one?

This is where the decision gets real. A cash balance plan is not free to maintain.

First, staff costs. In most practices, a cash balance plan has to cover more than just the partners. Nondiscrimination rules require meaningful benefits for non highly compensated employees too. Depending on the practice's demographics, the required staff contribution can be 5 to 8 percent of staff pay. For a practice with $1 million in staff payroll, that is $50,000 to $80,000 a year going to employees, not to you.

Second, administration. You need an actuary, a third party administrator, and annual testing. Budget $3,000 to $8,000 a year for a small plan, more for a complex one.

Third, the contribution is mandatory. Unlike a 401(k) profit sharing contribution that the practice can skip in a bad year, the cash balance contribution is a defined benefit obligation. The actuary sets it, and the practice has to fund it. In a year when revenue drops, that fixed cost still shows up.

Fourth, investment risk sits with the employer. The plan promises an interest credit. If the actual investments underperform that credit, the practice has to make up the difference. Most plans invest conservatively to match the credit, which is fine, but it means the money is not growing at stock market rates.

Who should not do one?

Skip it if any of these are true.

You are under 45 and the contribution limit for your age is not much above what you could already do with a 401(k) plus profit sharing. The complexity is not worth a small incremental deduction.

Your practice has a lot of young, long tenured staff. The nondiscrimination cost will eat the tax benefit. Run the numbers with the actuary before committing, not after.

Your income is variable and you are not sure you can fund the mandatory contribution every year. A cash balance plan does not care about your bad year.

You plan to leave the practice soon. Cash balance plans have vesting schedules, and leaving early can mean walking away from a chunk of the benefit.

You are already in a low tax bracket or expect to be in the same bracket in retirement. Without a rate gap, the arbitrage disappears and you are left with the costs.

For the right physician, usually a partner over 50 in a top bracket with a stable practice and manageable staff costs, it is the most powerful retirement tool available. For everyone else, max the 401(k) and move on.

The contribution figures in this answer are illustrative and depend on the plan's actuarial design. Confirm all limits and staff cost estimates with the plan actuary before deciding.

Follow up questions

Is the contribution optional in a bad revenue year?

No. A 401(k) profit sharing contribution can be skipped in a bad year. A cash balance contribution cannot. It is a defined benefit obligation, the actuary sets the amount, and the practice has to fund it.

Who sets how much goes in each year?

An actuary does. The contribution limit is built backward from the maximum annual benefit the tax code allows at retirement, which is why older physicians can put in much more than younger ones.

What does running one cost beyond the contribution?

Administration runs about $3,000 to $8,000 a year for a small plan, and nondiscrimination rules usually require meaningful benefits for staff too, often 5 to 8 percent of staff pay.

Keep going: the order every dollar follows once the 401(k) is full lives in the Tax Efficiency Ladder.

Published October 12, 2026. Last reviewed October 12, 2026.

Ryan Inman spent 10 years as a financial advisor to physicians, hosted the Financial Residency podcast, and founded Financial Fellowship to teach physicians the money mechanics of a medical career.

Have a money question from your own training or practice? Submit it at financialfellowship.com/submit. Real questions get real answers.

Takeaways

• A cash balance plan fits a physician who already maxes a 401(k), sits in a top tax bracket now, and expects a lower bracket in retirement.
• The limit is built backward from the maximum retirement benefit, so a 60 year old can often contribute $250,000 or more while a 40 year old might contribute about $80,000.
• Staff contributions can run 5 to 8 percent of staff pay, and administration another $3,000 to $8,000 a year.
• The contribution is mandatory every year, and investment risk sits with the employer, which for a partner means the practice.
• Skip it if you are under 45, carry a large young staff, have variable income, plan to leave soon, or expect the same bracket in retirement.