Maximize Tax Savings with Retirement Plans

For the owner of a successful professional practice, a retirement plan can do much more than help save for retirement. Properly designed, it can also create one of the practice’s largest recurring tax deductions.

This opportunity can be especially attractive for dentists, physicians, attorneys and other highly compensated professionals who earn substantially more than their employees—particularly when the practice has relatively few, younger, lower-paid employees.

The strategy is often built in three layers:

1. Safe harbor 401(k): Allows the owner to maximize 401(k) salary deferrals without the usual testing restrictions that can affect highly compensated employees.
2. New comparability profit sharing: Can direct a substantially larger employer contribution to the owner than to staff, subject to IRS nondiscrimination testing.
3. Cash balance plan: Can add another layer of potentially large deductible employer contributions, often taking annual retirement funding well into six figures.

For many practices, the first two layers are enough. For an owner with consistently high income who wants to save and deduct substantially more, adding a cash balance plan may be worth considering.

Start with a safe harbor 401(k)

For 2026, an individual can defer up to $24,500 into a 401(k). The maximum total annual contribution to a participant’s defined-contribution account—including salary deferrals and employer contributions—is generally $72,000, before catch-up contributions.

Compensation taken into account for plan purposes is generally capped at $360,000.

A safe harbor 401(k) generally requires the practice to make a minimum employer contribution for eligible employees. One common design is a 3% nonelective contribution, meaning the practice contributes 3% of compensation whether or not the employee puts any of their own money into the 401(k). In return, the 401(k) avoids annual nondiscrimination testing—called ADP/ACP testing—that can otherwise restrict how much owners and other highly compensated employees are allowed to contribute when rank-and-file employees contribute at lower rates.

In plain English, the safe harbor gives the owner much more certainty that he or she can maximize the 401(k). 

For a high-income practice owner, however, the bigger opportunity often comes from adding new comparability profit sharing.

Add new comparability profit sharing

Ordinarily, a profit sharing plan requires contributions for all employees in equal percentage. New comparability profit sharing is a departure from this default rule. It's a method of allocating the practice’s profit-sharing contribution. Rather than giving every employee exactly the same percentage of pay, the plan can divide participants into groups—for example, the owner and the staff—and provide different contribution percentages to each group.

The plan must still satisfy IRS nondiscrimination rules, but the approach can work particularly well when:

• the owner earns significantly more than the staff;
• the owner is older than most employees; and
• the practice has relatively few employees.

That describes many established professional practices.

Example: dentist with two employees

Assume a 49-year-old dentist owns a practice and earns at least the maximum compensation considered under the retirement-plan rules. The practice has two younger employees earning $60,000 and $70,000.

A simplified plan design might produce something like this:

In this illustration, the employees receive employer contributions equal to 5% of compensation, while the dentist reaches the $72,000 defined-contribution maximum. The practice contributes $47,500 for the dentist and only $6,500 for the two employees combined. That can be a very attractive tradeoff: the dentist funds a meaningful benefit for the team while receiving a substantially larger contribution personally.  

The exact numbers will depend on the ages, compensation and eligibility of every employee, and the plan must pass  annual nondiscrimination testing. But this illustrates why new comparability plans can be particularly effective for dental practices.

What does the tax benefit look like?

Assume the owner is able to put $72,000 into the retirement plan. If those dollars would otherwise be taxed at a 37% federal marginal income-tax rate, $72,000 of pre-tax retirement funding represents roughly $26,640 of current federal income-tax deferral.

The important word is deferral. Retirement-plan contributions generally reduce taxable income today, but distributions are typically taxable later. Still, for a professional in peak earning years, shifting taxable income from today into retirement can be extremely valuable—particularly if the owner expects to be in a lower tax bracket after selling or winding down the practice.

Want a much bigger deduction? Add a cash balance plan

For some professionals, $72,000 of annual retirement funding is enough.

For others, particularly established practice owners in their 40s, 50s or early 60s, the question becomes:

“Can I put away $150,000, $200,000 or more each year?”

That is where a cash balance plan can become attractive.

A cash balance plan is technically a defined-benefit pension plan. Unlike a 401(k), it is not governed primarily by one fixed annual contribution limit. Instead, an actuary determines the appropriate contribution based on factors including age, compensation, accumulated benefits and the plan’s design.

Because an older professional has fewer years until retirement, the plan may allow a much larger annual contribution for that professional than for younger employees.

Example: dentist with a 401(k) + cash balance plan

Assume the dentist’s 401(k) and profit-sharing plan provides $72,000 of annual retirement funding as provided above. The practice then adds a cash balance plan, and the actuary determines that the dentist can receive an additional $150,000 contribution.

The result:

$72,000 401(k) and profit sharing + $150,000 cash balance contribution = $222,000 of annual retirement funding

At a 37% federal marginal rate, $222,000 of pre-tax retirement funding represents approximately $82,140 of current federal income-tax deferral.

A $150,000 cash balance contribution is only an illustration. Depending on the dentist’s age, compensation, existing retirement benefits and other factors, the actual amount could be significantly higher or lower.

Why this can work particularly well for professionals

Professonal practices often have exactly the demographics that can make these plans efficient.

Consider a 55-year-old practice owner with four employees in their 20s and 30s.

The owner may earn several hundred thousand dollars per year, while staff compensation is substantially lower. Because the owner is older and closer to retirement, retirement-plan testing can sometimes support a much larger contribution for the professional while still providing appropriate benefits to employees.

The result can be a plan in which most of the practice’s total retirement-plan dollars ultimately benefit the owner.

That does not mean employees can simply be excluded. The practice must provide required employee benefits and pass IRS nondiscrimination rules. But with favorable demographics, the economics can still be compelling.

The DC/DB combination

Advisers sometimes refer to this strategy as a DC/DB combo:

DC = Defined Contribution: Safe harbor 401(k) + new comparability profit sharing.

DB = Defined Benefit: Cash balance plan.

The defined-contribution plan provides the first layer of retirement savings. The cash balance plan sits on top of it and can potentially add a much larger deduction.

For a high-income professional who is already maximizing a 401(k), this combination is often the retirement plan structure worth modeling.

What if the practice has no employees?

The economics become even simpler for a professional practice with no common-law employees other than potentially a spouse. An owner-only or “solo” 401(k) can provide substantial annual retirement contributions without the employee nondiscrimination considerations that apply to a staffed practice.

A cash balance plan can potentially be added on top.

For a practice operating a small specialty or without employees, the combination can create a particularly large retirement contribution relative to administrative cost.

The trade-off: cash balance plans require commitment

A profit-sharing contribution generally offers considerable year-to-year flexibility. A cash balance plan is different. Because it is a defined-benefit pension plan, annual funding is actuarially determined and the employer generally takes on a greater ongoing funding commitment.

That means cash balance plans tend to work best for professionals who have:

• consistently strong practice cash flow;
• several years of high income ahead of them;
• a desire to save substantially more than the 401(k) limit; and
• enough predictable profitability to comfortably make annual contributions.

A professional whose income fluctuates significantly may prefer the greater flexibility of a 401(k) and profit-sharing plan alone.

A practical way to think about it

For a  practice owner, the progression is often:

Step 1: Maximize the professional's own 401(k) salary deferral.

Step 2: Add a safe harbor contribution so the plan works smoothly for the owner and staff.

Step 3: Use new comparability profit sharing to increase the professinal’s employer contribution, potentially reaching the full defined-contribution limit.

Step 4: If the professional still wants a larger deduction, model a cash balance plan.

The right answer is highly dependent on the census of the practice—the age and compensation of every eligible employee. A retirement-plan administrator can often model several designs side by side before anything is implemented.

The bottom line

For a high-income professional practice owner, retirement plan design should be viewed as part of the practice’s overall tax strategy—not simply as an employee benefit.

A safe harbor 401(k) with new comparability profit sharing can potentially allow the professional to reach the annual defined-contribution maximum while keeping required staff contributions at an economically reasonable level.

For a professional seeking a substantially larger deduction, combining that plan with a cash balance plan may increase annual retirement funding into the six figures.

For the right practice, that can mean simultaneously: building significant personal retirement wealth, reducing current taxable income, and providing a valuable benefit to the dental team.

Because results depend heavily on employee demographics, compensation, ownership structure and the owner’s age, these strategies should be modeled with a qualified third-party administrator, actuary and tax adviser before implementation. Contact us and we can do the heavy lifting for you.