If you own a profitable business, your retirement plan often targets employees, not owners.
In Part 2 of our series, Rohit Punyani, co-founder and Chief Solutions Officer of The Owner’s Asset, sits with Jayson Lowe.
They explain how a cash balance plan vs 401(k) works and why it behaves differently.
Missed the start of the series? Watch Part 1 here.
Start with what you already know
Rohit teaches cash balance plan vs 401(k) by comparing them to the 401(k). But he’s upfront that this is a teaching shortcut, not a full compliance picture. Additionally, the contribution is recorded as a deduction. Consequently, on the back end, it rolls to an IRA, or you take required minimum distributions. Additionally, he explains they are roughly 96% the same: deduction upfront, IRA upon exit.
However, the other 4% is the most interesting part. Additionally, Rohit lays out four differences.
First, consider how much you can put in. How much you can put in. A 401(k) has the same ceiling whether you earn $100K or $1M. Nevertheless, Rohit views the system as inherently regressive. However, the high earner who needs advanced tax planning is really handcuffed by the 401k system. Similarly, a cash balance plan scales with age and income. In his example, a 55-year-old earning $1M a year can contribute about $300,000 to $350,000.
2. It’s a commitment. A pension isn’t a one-year decision. Rohit frames it as an intermediate- to long-term commitment, so it fits owners with a relatively stable business and a consistent tax liability.
3. What it can hold. A 401(k) holds stocks, bonds and cash. A 401(a) can hold those plus life insurance and annuities. That’s the specialty Rohit built his firm around, though he stresses it isn’t required.
4. What happens at the end. Rohit describes ways to take the insurance out of the plan and own it personally, which opens the door to strategies like infinite banking and multi-generational planning.
Is it too late if you’re in your 60s?
Rohit calls a cash balance plan a “time machine.” Many of his clients are 60 to 65: entrepreneurs who spent decades building the business and are under-saved for retirement. Because contribution room grows with age, he says even a three- or four-year runway can be worthwhile for the right owner. The contributions need to be meaningful, though. As the hosts point out, putting in $25,000 a year for three years is a very different outcome from $300,000.
A paint-by-numbers example (illustrative only)
Illustrative example, not a projection. These are Rohit’s round teaching numbers. Your results depend on your income, state, plan design and advisors.
- Business: $1M in revenue, $200K in deductions, $800K taxable income
- Assumed rate: 40% combined (37% federal bracket + 3% state)
- Tax without the plan: 0.4 × $800,000 = $320,000
- Owner contributes $300,000 to a cash balance plan, so taxable income becomes $500,000
- Tax with the plan: 0.4 × $500,000 = $200,000
- Difference: $120,000 that doesn’t go to the IRS that year
Rohit’s point is that this is only half the analysis. The $300,000 didn’t disappear. It went into assets. In his framing, if those assets are whole life insurance, the owner is effectively acquiring $300,000 of whole life for a net $180,000 after the tax savings. He sums it up as “a six-figure deduction for a seven-figure outcome.”
Why owners behave differently with a pension
Beyond the tax math, Rohit says the biggest surprise of his business is behavioral. Owners who know they have a guaranteed income floor tend to settle into their business and think longer term. Richard adds a framework he calls the five C’s: confidence, clarity, capital, cash flow and control.
The conversation also covers inflation as a “hidden tax,” why reinvesting every dollar back into the business is “a dangerous concentration,” and how Rohit thinks about holding the S&P 500 once an income floor is in place.
Questions to take to your advisor
- Is my business profit stable enough for a multi-year commitment?
- How much could I contribute at my age and income?
- How would a cash balance plan interact with my existing 401(k)?
- What would the plan hold, and what are my options when it ends?
This content is educational only and is not tax, legal or financial advice. It discusses U.S. tax rules. Speak with a qualified professional about your situation.
FAQ
What is the difference between a cash balance plan and a 401(k)? Both are tax-deductible retirement plans. Rohit Punyani highlights four differences: a cash balance plan can accept much larger contributions that scale with age and income, it’s a longer-term commitment, it can hold life insurance and annuities, and it offers options for those assets when the plan ends.
How much can a business owner put into a cash balance plan? It depends on age, income and plan design. In Rohit’s example, a 55-year-old earning $1 million a year could contribute around $300,000 to $350,000. That’s far above 401(k) limits.
Is it too late to start a cash balance plan at 60? Not necessarily. Because contribution room grows with age, Rohit says even a three- or four-year runway can matter for an owner in their 60s with stable profits, provided the contributions are meaningful.
How much tax can a $300,000 cash balance plan contribution save? In Rohit’s illustrative example ($800,000 taxable income, an assumed 40% combined rate), a $300,000 contribution lowers the tax bill from $320,000 to $200,000, a $120,000 difference. Actual results vary.
Can a cash balance plan hold life insurance? Yes. A 401(a) cash balance plan can hold life insurance and annuities as well as stocks, bonds and cash. It’s optional, not required.