Silly Money
The Top Secret Retirement Plan for High Earners
There is a secret retirement plan for high earners almost no one knows about.
Used by wealthy doctors, lawyers, executives, and other late career professionals, it can allow for tax deductions worth between $100,000-$300,000 every single year.
Let me introduce you to the Cash Balance plan and help you figure out if the “Cadillac of retirement plans” could be for you.
Don’t let SOC 2 kill your startup…
If you sell to mid-market or enterprise, these three words will eventually send chills down your spine:
“Send us your SOC 2”
And that one request can kill your momentum.
Engineers pulled off product.
Checklists that never end.
Deals stuck in limbo.
That’s why the team at Delve built a better way. Instead of months of busywork, founders use Delve to get audit-ready in days, not months.
To get ahead of SOC 2, ISO 27001, HIPAA, GDPR, and PCI-DSS compliance, book a demo today and use code SILLYMONEY1KOFF for $1,000 off.
Compliance shouldn’t be a tax on your long-term growth.
Defined Contribution vs Defined Benefit Plans
The tax code in America provides for two types of retirement plans:
Defined Contribution Plans
These plans have firm limits on exactly how much can be contributed every single year, but no limit in terms of how big the benefit you receive during retirement is.
You are probably already familiar with these plans: a 401k is a defined contribution plan that has very specific limits on the maximum amount that can be contributed every year.
Defined Benefit Plans
These plans have no set contribution limit, but instead work backward from providing a defined benefit at retirement.
There are many types of defined benefit plans — some popular examples include pension plans, cash balance plans and flat dollar plans.
While most people spend the majority of their time focusing on defined contribution plans, high earners can benefit from taking a look at defined benefit plans to supplant their defined contribution plan.
A cash balance plan, which is a type of defined benefit plan, can be ideal for certain types of high earning professionals.
Cash Balance Plan Overview
A cash balance plan is a type of defined benefit retirement plan but with a modern twist.
Unlike old school pensions that provide a fixed monthly payout based on salary and years of service, a cash balance plan maintains hypothetical individual accounts for each participant.
Your employer credits your account every year with:
A pay credit - a percentage of your salary (5%-8%)
An interest credit - a guaranteed rate tied to Treasury yields or a fixed percentage (4%-5%)
These accounts are structured to work backwards from the maximum retirement benefit of $280,000 a year, which roughly works out to a lump sum of ~$3.5 million at the age of 62.
These plans work incredibly well for self-employed individuals with high income.
Since you are both the employer and the employee, you can design the plan for the maximum employer contribution… which ends up being a very large annual tax deduction.
The other benefit of a cash balance plan is the balances are portable — when you shut the plan down, or get the maximum benefit at retirement, you can roll the funds over into an IRA or another retirement account.
From that point onwards, you can control exactly how to invest the dollars.
Let’s break down the Pros and Cons of these plans:
Pros:
Unmatched by size of benefit
There is no better option if you make a lot of money and want a mid 6-figure tax deduction.
The reason people put up with the pain of these plans is this is the gold standard for getting the maximum tax deduction.
Portability and flexibility
The ability to access the funds after you shut the plan down and roll it into another retirement account is awesome.
These plans are typically invested very conservatively, but by porting assets over at the end, you can eventually invest them how you like.
Can be combined with a 401k or a Solo 401k
These plans are NOT an alternative to a 401k plan or a Solo 401k, they work very well in tandem for an even bigger combined tax deduction.
Cons:
Expensive
While you get a massive tax deduction, you’re going to have to shell out real money to set one of these plans up.
Most providers charge setup fees between $2,500-$5,000 with an annual fee around $2,500 as well. The tax deduction could still be worth it though!
Painful to set up and shut down
These are not lightweight structures and do take some time and nuance to set up. Actuarial math is typically required to calculate the exact amount that can be contributed.
It’s only worth setting these up if you believe you can contribute to them for 3+ years.
Most providers suck
I wish I could phrase this more gently, but most providers of defined benefit plans are from the stone age and could make this whole process a bit more painful than you initially bargained for.
Cash Balance Contribution Limits
Calculating exactly how much you can contribute to a cash balance plan is surprisingly complicated.
The formula works something like this:
We start with the amount we want at retirement - you typically want to maximize this to get the full ~$3.5M benefit.
Run some actuarial math to calculate the future value of dollars today, including annual growth assumptions baked in. Here we factor in:
How much money you make
How old you are and how many years are left to retirement
Assumptions on rate of growth inside the plan
Use software to produce the magic number for maximum contributions
This number can in turn be combined with a 401k or a Solo 401k plan to get your maximum total annual tax deduction across all retirement plans.
To illustrate what these numbers could look like, I pulled estimates for someone with these criteria:
A solo business owner
Earning $500,000 per year
Including a Solo 401k plan as an option
Age | Cash Balance Contributions | Cash Balance + Solo 401(k) |
|---|---|---|
30 | $72,000 | $142,000 |
31 | $76,000 | $146,000 |
32 | $80,000 | $150,000 |
33 | $84,000 | $154,000 |
34 | $88,000 | $158,000 |
35 | $93,000 | $163,000 |
36 | $98,000 | $168,000 |
37 | $103,000 | $173,000 |
38 | $108,000 | $178,000 |
39 | $113,000 | $183,000 |
40 | $118,000 | $188,000 |
41 | $124,000 | $194,000 |
42 | $131,000 | $201,000 |
43 | $137,000 | $207,000 |
44 | $144,000 | $214,000 |
45 | $152,000 | $222,000 |
46 | $159,000 | $229,000 |
47 | $168,000 | $238,000 |
48 | $176,000 | $246,000 |
49 | $185,000 | $255,000 |
50 | $195,000 | $272,500 |
51 | $205,000 | $282,500 |
52 | $215,000 | $292,500 |
53 | $226,000 | $303,500 |
54 | $238,000 | $315,500 |
55 | $250,000 | $327,500 |
56 | $263,000 | $340,500 |
57 | $276,000 | $353,500 |
58 | $290,000 | $367,500 |
59 | $305,000 | $382,500 |
60 | $321,000 | $402,250 |
61 | $337,000 | $418,250 |
62 | $354,000 | $435,250 |
63 | $347,000 | $428,250 |
64 | $340,000 | $417,500 |
65 | $333,000 | $410,500 |
66 | $325,000 | $402,500 |
67 | $318,000 | $395,500 |
68 | $310,000 | $387,500 |
69 | $302,000 | $379,500 |
70 | $293,000 | $370,500 |
Pretty wild, right?
A couple of observations:
Adding a defined contribution plan like a Solo 401k and combining it with a cash balance plan makes for a very material increase in the maximum allowed deduction.
Age is a very important factor in how big a tax deduction you can get:
$70K at 30, $118K at 40, $195K at 50, $320K at 60
You can also estimate this yourself by using an LLM and entering your age, state of residence and income.
Here’s a screenshot from Grok:
Who a Cash Balance Plan is Best Suited For
We’ve learnt that these plans are unmatched by size of benefit, but fairly painful to set up and administer.
This begs the question… who exactly are these plans best suited for?
There are three separate personas that would benefit from having one of these plans:
A solo business owner earning mid 6-figures or more
If you earn $300,000 or more as a solo business owner (or with your spouse working for the business), you could save a massive amount in taxes with a cash balance plan.
You do not need to worry about ERISA compliance since you don’t have other employees, which takes some of the sting out of setting them up.
But ensure you can maintain your income level for at least 3 years before going through the hassle!
A doctor, lawyer, consultant or someone else in professional services
These plans are used a lot by physicians, lawyers, consultants and other people in professional services who typically do not start earning a high salary till relatively late in life.
Also, if you earn a staggering amount in high W-2 compensation ($1M+), you may not have better options for bringing down your tax rate so a cash balance plan could be a good option.
Someone older who wants to “catch up” on retirement contributions
Since contribution limits are tied to age, the older you are, the more you can contribute to a cash balance plan and get a bigger tax deduction.
These plans seldom make sense at 30… but by the age of 50+, you start getting really generous maximum tax deduction amounts.
It can be a great way to fast track a meaningful amount of dollars in retirement accounts.
Reply to this email and let me know if you found this topic insightful and what you would like to hear about next!
Some of the content ideas we’re spinning up soon:
How to optimally use an HSA to grow your net worth
How taxes work for US expats and digital nomads
Choosing the right incorporation structure for your business
How I “travel hack” my credit cards
& a whole lot more
Until next week!
Disclosures: This post is for informational and educational purposes only and solely reflects the personal views of the author. It is not investment, legal, tax, or professional advice. Any examples, experiences, or investment returns discussed do not guarantee future results. Laws and regulations discussed are subject to change and may not apply to your individual circumstances. Unless specifically stated, posts do not reflect the views or opinions of The Vibes Company Inc. or its affiliates.
