For Physicians & Dentists
A practice owner at the top of their income can often deduct several times what a 401(k) allows. Most never hear about it, because the plan that does it needs an actuary — and nobody at the custodian sells one.
There is a stretch in a practice owner’s career, usually somewhere between the late forties and early sixties, when three things are true at once. The practice is producing more than it ever has. The children’s tuition is either finished or nearly. And the tax bill is the largest it will ever be.
That stretch is short. It is also the only window in which the deduction described on this page is worth much, because the amount you are allowed to put away rises steeply with age — and then you retire.
Most owners spend it contributing to a 401(k) and wondering why the number feels so small against what they are earning. The number is small. That is not a mistake in how you set it up. It is the design of the plan.
A 401(k) with profit sharing is a defined contribution plan. The name is the constraint: the law caps what goes in. For 2026 the ceiling for one person looks like this.
| 2026 defined contribution limits | Amount |
|---|---|
| Salary deferral into the 401(k) | $24,500 |
| Employer profit sharing, up to the combined cap | $47,500 |
| Total into the plan for one person | $72,000 |
| Catch-up if you are 50 or older | + $8,000 |
| Catch-up if you are 60 to 63 (instead of the above) | + $11,250 |
| Compensation that can be counted, at most | $360,000 |
Source: IRS Notice 2025-67 and IR-2025-111, the 2026 cost-of-living adjustments.
So an owner earning $700,000 and an associate earning $200,000 have the same ceiling. Eighty thousand dollars, give or take the catch-up. The associate is sheltering a large share of their income. The owner is sheltering about a ninth of it.
Nothing about that changes by choosing better funds, a cheaper custodian, or a more attentive 401(k) provider. The cap is statutory. To go past it you need a different kind of plan.
A cash balance plan is a pension. Not the retail sense of the word — the real one, a defined benefit plan, the kind large employers used to run before they stopped.
The difference matters, and it is the whole trick. In a 401(k) the law caps what goes in. In a pension the law caps the benefit you may end up with, and then an actuary works backwards to calculate what has to be contributed each year to get there. If you are 55 and starting from nothing, that backwards calculation produces a large number, because there are not many years left to fund it.
The plan reads like a savings account. Each participant has a stated balance that grows by two credits a year: a contribution credit set by the plan document, and an interest credit at a rate the plan specifies. It is not a real account — the assets are pooled and the employer is on the hook for the promised balance — but it behaves like one from the participant’s side, which is why most people find it easier to understand than a traditional pension.
Because the contribution is driven by age, the same practice supports very different amounts depending on who is in the chair.
| Age of the owner | First-year cash balance contribution |
|---|---|
| 40 | $124,000 |
| 45 | $159,000 |
| 50 | $204,000 |
| 55 | $262,000 |
| 60 | $336,000 |
| 62 | $349,000 |
First-year estimates at the $360,000 compensation limit, 2026. These are illustrative. Actual amounts are set by an enrolled actuary for the specific plan and vary case by case and year to year.
Read the table the right way round. The reason a 62-year-old can put away $349,000 is not generosity. It is that the plan has to fund a lifetime benefit in a handful of years rather than twenty-five. The large number is a symptom of being late, not a reward for being senior.
Take a dentist, 55, sole owner of the practice, married filing jointly, living in Illinois. Household income of $700,000. The practice pays her $360,000 in W-2 wages and the rest arrives as distributions.
She already has a 401(k) with profit sharing. She adds a cash balance plan alongside it.
| What she can deduct in 2026 | Amount |
|---|---|
| 401(k) salary deferral | $24,500 |
| Profit sharing, to the $72,000 combined cap | $47,500 |
| Catch-up contribution, age 55 | $8,000 |
| Cash balance plan | $262,000 |
| Total deducted | $342,000 |
And what that does to the bill:
| 401(k) only | With the pension | |
|---|---|---|
| Taxable income | $667,800 | $325,800 |
| Federal tax | $171,268 | $63,388 |
| Illinois tax | $34,650 | $17,721 |
| Total tax this year | $205,918 | $81,109 |
2026 brackets and the $32,200 joint standard deduction; Illinois at its flat 4.95%. Simplified: it does not model the qualified business income deduction, payroll taxes, the net investment income tax, or the cost of covering staff. Your situation will differ.
The tax deferred this year is $124,810. Her top marginal rate falls from 35% to 24% — and the money set aside was, in effect, being taxed at about 36.5% before she set it aside.
That last figure is the one worth holding onto. It is not the headline deduction that matters. It is the rate the deduction removes.
Every dollar in that plan is taxed eventually. The IRS is patient, not forgetful. So the honest way to describe what happened above is not “she saved $124,810” — it is that she moved $342,000 of income out of a 36.5% year and into some future year at a rate not yet known.
The strategy is only worth doing if that future rate is lower. Which raises the obvious question: how would anyone arrange that?
Usually by using the gap. Between the year the practice income stops and the year required withdrawals begin at 73, there is often a stretch with very little taxable income and a large pre-tax balance sitting there. That stretch is when money comes out cheaply, or gets converted to Roth cheaply. In Illinois it is cheaper still, because the state does not tax qualified retirement plan distributions at all — including conversions.
The two halves are one plan. Deferring at 36.5% during practice years and withdrawing at 12% to 24% during the gap years is where the actual money is. Deferring at 36.5% and then withdrawing at 32% because nobody planned the second half is a lot of administrative effort for a modest result.
If you take one thing from this page: do not adopt the plan without knowing how the money comes back out.
This is not a strategy without friction, and an adviser who presents it as one is not describing it accurately.
None of this makes the strategy a bad one. It makes it a strategy with a shape — it suits a profitable practice, a stable income, an owner over about 45, and a team small enough or compensated in a way that the coverage cost works. Where those conditions do not hold, the answer is usually no, and it should be.
A cash balance plan is not a product we sell you. It is a structure that several parties build together, and our role is to hold the pieces in one place so that you are not the one coordinating them between patients.
We have facilitated these before. The first conversation is not a sales meeting; it is an arithmetic meeting, and quite often it ends with the number not being large enough to justify the effort. That is a legitimate result.
Most practice owners have a second, quieter assumption running underneath all of this — that when the time comes, the practice sells, and the proceeds fill the gap. Sometimes that is right. It is worth pressure-testing.
For physicians, the ground has moved. The share of doctors working in practices wholly owned by physicians fell from 60.1% in 2012 to 42.2% in 2024, while hospital-owned practices rose from 23.4% to 34.5%. Private equity, the other assumed buyer, has cooled sharply: physician practice management deals ran at 851 in 2021 and just 105 in the first half of 2026, with more than a dozen states adding oversight of health care deals.
For dentists the buyer is more likely a dental service organisation, and the pricing is more established — roughly 5× adjusted earnings for a smaller single-location practice, rising towards 10× to 12× for larger multi-site groups, with specialties commanding one to three turns more. What surprises owners is rarely the multiple. It is the structure. As much as 40% of a corporate deal can be paid in equity rather than cash, which means a meaningful part of the price depends on how the buyer performs after you have handed over the keys.
The number in your head is usually a gross number. What matters is what lands in your account after deal structure, after taxes, and after any part of the price that stays at risk. We cover that in detail in what you actually keep when you sell, and the personal side — which catches more owners out than the financial side — in exit planning.
The connection to the first half of this page is direct. Every year the pension is funded is a year the practice sale matters slightly less. That is the point of it. You are converting an illiquid, single-buyer, hard-to-value asset into a liquid one, on your own schedule, at a discount granted by the tax code.
Newly opened practices still investing in build-out. Owners under about 40. Income that swings hard year to year. Practices with a large staff relative to owner compensation, where the coverage cost eats most of the benefit. And anyone who would need the money back inside a decade.
The honest first step is a calculation, not a proposal. Thirty minutes to see whether the numbers are large enough to be worth your attention — and to say so plainly if they are not.
30 minutes with Ara Bayindiryan — no cost, no obligation.
Bayworth Capital serves clients across the North Shore and greater Chicago.