Cash Balance Plans Let 401(k) Holders Defer $300,000 Annually. Most Never Find Out.

"Most partners think of the 401(k) as a single bucket capped near the elective deferral limit. Big Law plans typically run three buckets stacked on top of each other, and the bonus can be routed through all three. The first layer is the elective deferral, already maxed in this scenario at $24,500. The second is the after-tax (non-Roth) bucket, which fills the gap up to the $72,000 section 415(c) annual additions limit minus elective deferrals and any firm contribution. For a partner whose firm makes a modest profit-sharing contribution, that leaves roughly $40,000 to $45,000 of after-tax headroom. Convert it in-plan to Roth the same pay period and the growth is tax-free forever, no income limits, no backdoor IRA gymnastics."

"The third layer is the one that actually moves the needle: a firm-sponsored Cash Balance Plan bolted on top of the 401(k). Because contributions are actuarially determined by age and compensation, a partner in her late 40s can defer $200,000 to $300,000 of pre-tax dollars into it. Senior partners in their late 50s often clear $300,000."

"Stack all three and the total bonus shelter lands at roughly $250,000 to $340,000. At a 37% federal rate plus roughly 10% state (call it New York or California), sheltering $250,000 produces $117,500 of immediate tax savings. That is real money she keeps, deferred into accounts that grow without annual drag."

A partner with K-1 income in the 37% federal bracket can reduce current taxes by using multiple contribution layers inside a firm retirement plan. The elective deferral bucket is capped at the standard limit and can already be maxed. An after-tax non-Roth bucket can fill remaining space under the section 415(c) annual additions limit, and in-plan conversion to Roth can make the growth tax-free without income limits. A firm-sponsored cash balance plan can add a much larger pre-tax deferral amount based on age and compensation, often reaching $200,000 to $300,000 or more for senior partners. Combined, these layers can shelter roughly $250,000 to $340,000, producing substantial immediate tax savings.

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