How it works
Legally, a cash balance plan is a defined benefit plan, the same family as a traditional pension. What makes it different is how the benefit is described. Instead of promising a monthly income at retirement, the plan keeps an account for you and adds two things to it each year:
- A pay credit: an amount set by the plan's formula, often a flat dollar figure or a percentage of pay. For a one-person business, the pay credit is designed to be close to the most the rules allow.
- An interest credit: growth on the balance. Some plans credit a fixed rate. Others credit the actual return the plan's investments earned, gains and losses alike.
The business pays money into a trust account at a brokerage firm to fund those credits and deducts what it pays. At retirement, or when the plan ends, you can take the balance as a lump sum and roll it into an IRA without tax.
Why the limit is so much higher than a 401(k)
A 401(k) caps what goes in each year: $72,000 in 2026, plus a catch-up for people 50 and over. A defined benefit plan is capped by what may come out: an annual benefit at retirement of up to $290,000 a year, or 100% of your average pay if that is lower (IRC 415(b)).
Turned into a lump sum, that ceiling is worth millions of dollars. The plan is allowed to fund it over the years you have left before retirement, so the fewer years remain, the more you may contribute each year. That is why the numbers climb so steeply with age.
| Age | Cash balance plan | Solo 401(k) alone |
|---|---|---|
| 40 | $103,000 | $72,000 |
| 45 | $156,000 | $72,000 |
| 50 | $201,000 | $80,000 |
| 55 | $260,000 | $80,000 |
| 60 | $270,000 | $83,250 |
Your own figure depends on your pay, how long you have been in the business and your other retirement plans. See the limit at each age or run the calculator.
Who it suits
A cash balance plan is most useful for someone who:
- works for themselves and has no employees other than a spouse
- earns well beyond what they need to live on, and expects to for at least the next three to five years
- is already putting the most they can into a 401(k) or SEP IRA
- is in their 40s, 50s or 60s, when the limits are highest
It suits people less well when income swings sharply from year to year, because the plan comes with a minimum contribution every year. It also changes once you hire: see what happens when you hire.
It works alongside a 401(k)
Most owners keep their Solo 401(k) and add a cash balance plan on top. Salary deferrals to the 401(k) are unaffected. The employer profit-sharing part is generally held to 6% of pay in years when both plans are funded, because of a combined deduction limit. The details are in using a cash balance plan with a Solo 401(k).
The commitment
A cash balance plan is not a savings account you top up when you feel like it. Each year an enrolled actuary works out a range, from a minimum required contribution to a maximum deductible contribution, and the business has to put in at least the minimum. The IRS also expects the plan to be permanent, which in practice means keeping it for several years unless your circumstances change.
In return, the range is usually wide. Many owners choose a figure each year based on how the business did, anywhere between the two ends.
What it costs to run
A cash balance plan needs a plan document, an actuarial valuation every year and, once the plan holds more than $250,000, a yearly Form 5500-EZ. Providers charge for that work, typically a few thousand dollars a year for a one-person plan. See what a cash balance plan costs.
A plan for one person has fewer rules
When the only people covered are the owner and their spouse, the plan sits outside Title I of ERISA and outside the government's pension insurance program. There are no nondiscrimination tests to pass and no employees to cover, which is why these plans are simpler and cheaper to run than a pension for a company with staff. See who can have a solo cash balance plan.