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There are many different types of retirement plans, but one of the lesser known is the cash balance plan. These plans have grown in popularity in recent decades and are often used by high earners in smaller businesses to set aside more for retirement than they could in traditional plans such as a 401(k) or IRA.
Here’s what investors should know about cash balance plans.
What is a cash balance plan?
A cash balance plan is a type of defined-benefit plan that also shares some characteristics with defined-contribution plans, such as a 401(k). A cash balance plan’s benefit is stated in terms of the account balance, which can be used to set up an annuity at retirement, or rolled over into an IRA or another employer’s retirement plan.
For example, if an employee with a cash balance plan has an account balance of $500,000 at retirement age, they can receive an annuity based on that amount, or take a lump sum and roll it over into another plan.
The IRS allows you to accumulate a certain account balance depending on your age and other factors, and adjusts the limit each year for inflation. A 62-year-old can accumulate up to about $3.6 million in a cash balance plan in 2025.
Employers make annual credits to each participant’s account in the form of “pay credits” and “interest credits.” The employer manages the investments and bears the risk, unlike 401(k) plans where the risk sits with employees.
The majority of cash balance plans are offered by small businesses with fewer than 100 employees, such as doctor’s offices or law firms. The plans allow for contributions that are multiples of what’s allowed under traditional retirement plans.
Cash balance plan contribution limits
2025 Maximum contribution limits: Cash balance plan vs. 401(k)
| Age | 401(k) employee | 401(k) total | Cash balance plan |
|---|---|---|---|
| 66-70 | $31,000 | $77,500 | $383,000 |
| 60-65* | $31,000 | $77,500 | $342,000 |
| 55-59 | $31,000 | $77,500 | $280,000 |
| 50-54 | $31,000 | $77,500 | $218,000 |
| 45-49 | $23,500 | $70,000 | $170,000 |
| 40-44 | $23,500 | $70,000 | $132,000 |
| 35-39 | $23,500 | $70,000 | $103,000 |
| 30-34 | $23,500 | $70,000 | $81,000 |
*Note: Starting in 2025, the catch-up contribution for workers aged 60, 61, 62 or 63 is $11,250.
Source: FuturePlan by Ascensus
Cash balance plan: Advantages and disadvantages
Advantages
Disadvantages
Bottom line
Cash balance plans are a type of defined-benefit plan that allow employees to accumulate millions in savings at retirement age, which they can then use to set up an annuity or roll over to another retirement plan, such as an IRA. The plans are popular with small businesses that have high-earning employees, such as law firms or doctor’s offices.
Contribution limits are significantly higher than for traditional retirement plans, with older workers able to set aside more than $300,000 annually.
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