We will be periodically changing the format of our monthly article to include case studies that address specific situations and how applying proactive planning techniques may improve the situation. That said, please always seek professional assistance to address your specific circumstances and objectives.
Most employees of any company earn what is referred to as W2 income – income that is reported on a Form W2. These employees often have a retirement plan, such as a 401(k) plan, offered by their employer. Their maximum salary deferral in 2026 is $24,500 if they are under age 50. If they are age 50 – 59 or age 64 or over, they can make a catch-up contribution of an additional $8,000, and if age 60 – 63, that catch-up contribution is an additional $11,250.
What if the employee wants to contribute more toward their retirement savings? If they are participating in the employee-sponsored retirement plan, there are specific income limits that may preclude them from making deductible IRA or Roth IRA contributions.
In the employee happens to have self-employment income in addition to their employment income (W2), they may have the opportunity to save a considerable amount of assets in addition to their 401(k) plan at work. Because the self-employment income is reported on a Form 1099 and be reflected on Schedule C of their tax return, this has, in effect, created a separate entity – most likely a sole proprietorship.
Let’s assume a physician works at their local hospital as a W2 employee. This physician is most likely a participant in the retirement plan offered by the hospital, such as a 403(b) plan. But this physician also has 1099 income from services performed away from the hospital and wants to make substantial contributions to a plan for retirement. After speaking with their financial advisor, the physician discovers that the sole proprietorship created by the 1099 income can establish a certain type of defined benefit plan, referred to as a Cash Balance Plan.
The design parameters of a Cash Balance Plan are beyond the scope of this article, and it is important to note that the annual administration of the Plan can be somewhat expensive since an actuarial calculation is required each year. But once established, the maximum allowable Cash Balance contribution for a 50-year-old in 2026 is $204,000 and increases to $349,000 at age 65. All contributions made to a Cash Balance Plan are considered deductible employer contributions, which allows the physician to fully contribute to the hospital’s 403(b) retirement plan as employee contributions.
From a retirement planning standpoint, this physician has been able to take 1099 income that likely would otherwise just be spent and create an additional tax-deferred pool of assets to generate retirement income. Given the significant contribution limits, it is not uncommon for a Cash Balance Plan established in this manner to accumulate $1MM or more which is in addition to the accumulation in their 403(b) plan. A little planning with 1099 income can make a significant impact on the quality of life in retirement.
Actual performance and results will vary. This case study does not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted for your specific situation.