Don’t Let IRS Caps Dictate Your Deductions: How Law-Firm Partners Use Cash Balance Plans

Most law firm partners assume their tax deductions are set in stone. They think the IRS decides what they can take, and their CPA just fills in the blanks. But elite partners think differently.

They don’t treat the tax code as a list of limitations. They treat it as a planning tool. When you’re running a profitable practice and earning substantial income, your most significant advantage is how you structure that income, not just how much you make.

If you’re still relying on a SEP IRA or 401(k), you’re likely leaving a huge chunk of your income on the table. These tools were built for simplicity, not strategy. This article is about taking back control. Because the partners who plan intentionally are the ones who keep more, grow faster, and lead smarter.

The Truth About “Allowed” Deductions

Your deduction potential is driven by plan type and design within IRS limits.

A SEP IRA caps your contribution at 25% of compensation, up to $69,000 in 2024. A solo 401(k) gets you a little more flexibility, but the ceiling still holds. These plans were built for simplicity, not for high-income partners.

CB plans offer a different path.

They are fully IRS-qualified and allow much larger contributions. Depending on your income and age, you can contribute and deduct well over $150,000 per year. In many cases, that number is closer to $200,000 or more. And it’s not just a bigger deduction. It’s a smarter one, because it aligns with your actual income, tax bracket, and long-term goals.

Example:

A 52-year-old partner earning $650,000

• SEP IRA: capped at $69,000
• Cash Balance Plan: contributes $215,000+
• At a 32% tax bracket, that’s $68,800 in potential tax savings.

Many may assume this is a loophole. But it’s just a clever way of making the IRS norms work for you. Most high earners never reach this level of planning because no one shows them how. But elite partners don’t wait for permission; they plan on purpose.

Why Traditional Retirement Plans Fall Short for High-Income Partners

Many law firm partners are still using SEP IRAs, solo 401(k)s, or SIMPLE IRAs to manage retirement contributions. These plans are easy to set up and are often recommended by generalist CPAs. But they were developed for modest-income earners, not successful professionals generating $500,000 or more each year. Once your income grows, these plans quickly become a ceiling, not a strategy.

Here’s why:

• SEP IRA
  A SEP IRA limits your contributions to 25% of your compensation, with a 2024 cap of $69,000. That cap doesn’t increase if your income grows. There’s no flexibility to contribute more in a high-profit year or to time your deduction strategically. There’s also no catch-up feature if you’re over 50. For partners earning several hundred thousand dollars or more, the SEP IRA leaves a large amount of taxable income untouched.
• Solo 401(k)
  Solo 401(k)s allow both employee and employer contributions, which increases the limit to $76,500 for those over 50 in 2024. But that ceiling comes fast, especially once your income crosses $300,000. Like the SEP, it’s still a fixed-limit tool with no built-in adaptability. It doesn’t scale with your firm’s performance or support more sophisticated wealth planning. Once you grow past a certain level, it stops delivering meaningful tax relief.
• SIMPLE IRA
  SIMPLE IRA deferral is $16,000 in 2024 ($3,500 catch-up if 50+), plus required employer contributions (3% match or 2% nonelective).

Employer matching is required and capped. For high earners, the SIMPLE IRA has almost no impact on taxable income. It’s a starter plan, not a long-term strategy, and most partners outgrow it well before they realize it.

Each of these tools was built to be simple, not strategic. They can’t adjust to income swings. They don’t allow you to accelerate contributions in peak years. And they don’t support the kind of long-term, tax-efficient planning that high-income partners need. SIMPLE IRAs trade administrative ease for lower deferral capacity.

If your earnings have grown but your deductions haven’t, it’s not a tax problem; it’s a planning problem. And it can be solved.

Why Elite Partners Must Convert Income Into Wealth

For most law firm partners, the income is good, sometimes exceptional. But income alone doesn’t build wealth. And in a profession where there’s often no equity stake to sell or business to exit, wealth building has to be deliberate.

Elite partners don’t just aim to earn more. They aim to retain more, protect more, and build something that lasts beyond the practice.

The challenge is that traditional law firm income is taxed at high ordinary rates. Without a strategy in place, much of what you earn is lost to taxes each year. That’s why the smartest partners look for ways to convert active income into long-term, tax-advantaged wealth.

A CB plan creates a pathway to do precisely that. By moving a portion of your annual income into a qualified retirement plan, you’re not just reducing your current tax liability; you’re building personal capital in a structure that compounds over time. That capital is yours. It’s portable, protected, and meant to grow.

This is especially critical for partners without a clear exit strategy. Unlike founders in other industries, many lawyers won’t sell their stake in the firm. Which means the retirement wealth has to be created from earnings, not from a liquidity event.

Partners who think this way don’t just play defense with taxes. They play offense with financial strategy. And that shift is often what separates income earners from actual wealth builders.

What Would a CB Plan Do for Your Income?

High-income partners often default to a familiar pattern: the firm does well, so they take home more income. But that kind of reactive draw creates unnecessary tax exposure. It turns profit into tax liability instead of long-term value.

A CB plan gives you a more intentional way to approach compensation.

Instead of simply increasing your take-home pay, you can design a smarter financial stream, one that reflects your firm’s profitability, supports your long-term goals, and gives you more control over how and when income is taxed.

The plan structure allows you to contribute significantly more than a SEP or 401(k), often $150,000 to $250,000 or more each year, depending on age and income, and are actually determined under various IRS rules. That contribution becomes deductible, reducing your current tax burden while building retirement wealth in a protected environment

importantly, the plan is flexible. Contributions can vary year to year based on how your firm performs, and design parameters can be adjusted to reflect evolving goals. You're not locked into a rigid system. You’re operating within IRS guidelines, but on terms that match how your practice functions

This isn’t just about minimizing your tax bill. It’s about leading like an owner. Strategic compensation planning is a hallmark of high-functioning firms. It helps smooth out income across years, reduce bracket creep, and accelerate wealth building, all while staying fully compliant.

When you use a CB plan as part of your income strategy, you’re not just earning more. You’re managing income in a way that’s aligned, deliberate, and built to last.

How a Cash Balance Plan Transforms Income Strategy

What About Employees?

It’s a fair question. When partners hear about qualified plans with high contribution potential, their next concern is often: “Do I have to give all this to staff too?”

Employee benefits are required but can be modest in lean firms; exact costs depend on demographics and nondiscrimination testing. The sample table is illustrative only; your enrolled actuary must certify compliance.

CB plans are compliant, but also customizable. You don’t have to overcommit to employee benefits just to unlock value for yourself. In a lean firm, employee contributions typically account for less than 10% of what partners receive. That cost is predictable, tax-deductible, and often viewed as a retention benefit, not a burden. Of course, these examples are illustrative and subject to actuarial testing.

The plan can also be layered on top of your existing 401(k), giving employees something familiar while reserving the larger value for the firm’s leadership.

If you’re the one driving growth, building the client base, and managing risk, the plan should reflect that. And it can, without sacrificing compliance or simplicity.

What matters is that the structure fits your goals. And that’s precisely what proper plan design makes possible.

Sample CB Plan Contribution Breakdown

Note: Staff contributions typically follow a 10% formula for compliance and vest gradually. Contributions are deductible to the firm and can support retention goals.

This Year’s Income Deserves More Than Last-Minute Planning

High-income partners who leave retirement planning to tax season often pay for it in higher taxes, missed deductions, and lost compounding time. It’s not a question of effort. It’s a question of timing and structure.

The tax code doesn’t just reward those who earn. It rewards those who plan.

A CB plan isn’t something you scramble to set up in December. It works best when it’s built into your compensation and income strategy early in the year, when you still can shape how income flows, how taxes are managed, and how long-term wealth is created.

That’s what elite partners do differently. They don’t wait to see what’s left over after taxes. They decide what goes to taxes and what goes to them. Then they work backward from that number, within full IRS compliance, to structure a smarter outcome.

This is about more than deductions. It’s about discipline, control, and ownership over the financial side of your practice.

The longer you wait to act, the more you lose to default structures. Partners who take control early often find they don’t just save more. They plan better, lead better, and build faster toward financial independence.

Disclosure: The information provided on this website is for general informational and educational purposes only and is not intended as legal, tax, or investment advice. Actual tax savings will vary based on your individual circumstances, including filing status, income level, existing retirement plans, and other deductions. Cash Balance Plans and other retirement strategies must be carefully structured and administered to comply with IRS regulations. You should consult with a qualified tax advisor, financial planner, and/or pension specialist before implementing any strategy discussed here.