This conversation happens frequently. A business owner who’s nearing retirement has an exceptional year. Revenue is strong. Profitability is up. The owner has already maximized the opportunities available through the company’s 401(k), and the CPA can see a significant tax obligation taking shape.
By Jeff Herman
That raises a natural question: Is there an option to use some of that income to strengthen the owner’s retirement position while potentially reducing current taxable income?
The answer is yes.
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Consider a Hypothetical Business Owner
Suppose a 55-year-old business owner is having a particularly profitable year.
The owner has already maximized the available 401(k) and profit-sharing opportunities but would like to:
- Put substantially more toward retirement.
- Reduce current taxable income.
- Build assets outside the operating business.
- Catch up after spending years reinvesting heavily in the company.
After reviewing the business, workforce, and retirement objectives, an actuary determines that the business could make a $200,000 deductible contribution to a cash balance plan.
That $200,000 is not simply moved from one investment account to another.
Assuming the contribution is deductible under the applicable rules, it reduces taxable business income while directing the money toward the owner’s retirement benefit. IRS guidance provides that employer contributions to qualified plans may be deductible, with deductions for defined benefit plans determined based on actuarial assumptions and calculations.
What Could the Tax Impact Look Like?
Consider the same hypothetical owner in the 35% federal marginal income-tax bracket.
A $200,000 deductible contribution could potentially reduce federal income tax attributable to that income by approximately: $200,000 × 35% = $70,000.
At a 37% marginal rate, the potential federal income-tax reduction on that same amount would be approximately: $200,000 × 37% = $74,000.
For 2026, the highest federal marginal rates remain 35% and 37% for taxpayers above the applicable income thresholds.
Those numbers are illustrative, not guarantees. The actual tax result depends on the owner’s filing status, entity structure, taxable income, state taxes, other deductions, and numerous other factors.
But they show why the conversation matters.
Instead of paying income tax on dollars that remain inside the business or flow through to the owner, the business may be able to direct a portion of those dollars toward a qualified retirement plan and receive a current deduction.
The Opportunity Is Bigger Than the Deduction
The immediate tax benefit can be compelling, but it should not be the only reason to establish a cash balance plan. Let’s look at this through the investment advisor’s eyes, who is tasked with helping this business owner generate income in retirement.
The owner is moving assets from current income into a retirement structure designed to accumulate money for the future. That can be especially attractive for an owner who spent much of their career building the business rather than maximizing personal retirement savings.
In that sense, a cash balance plan can potentially address two objectives simultaneously:
Reduce current taxable income and accelerate retirement accumulation.
This is where strategic collaboration between the CPA and investment advisor becomes important.
The CPA sees the profitability, taxable income, entity structure, and cash-flow picture.
The investment advisor understands the owner’s retirement timeline, existing assets, income needs, and broader financial plan.
Together, they can identify whether the client has both the financial capacity and retirement need to explore a larger plan.
An actuary or third-party administrator can then model the plan and determine what contributions may actually be supportable.
This is where the conversation pivots from “how large a deduction can we create?” To “does this business have an opportunity to redirect some of today’s income toward the owner’s long-term retirement plan in a tax-efficient way?”
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If you have a business-owner client having an unusually strong year, already maximizing existing retirement contributions, and beginning to focus on the tax impact, that may be the right time to have this conversation.
I’m happy to work alongside you to look at the client’s retirement goals, current plan structure, and broader financial picture, then bring in the appropriate actuarial or plan-design expertise to determine whether a cash balance plan is worth modeling.