Defined Benefit Plans
A defined benefit plan can allow business owners to reduce taxable income by $100,000 to $200,000 or more per year, significantly more than a 401(k) alone, while building substantial tax-deferred retirement wealth.
What Is a Defined Benefit Plan?
A defined benefit (DB) plan is a type of retirement plan that promises a specific monthly benefit at retirement, calculated based on salary and years of service. Unlike a 401(k), the contribution limits are based on the desired benefit, which means much higher annual contributions are possible, especially for older business owners with high incomes.
Two Strategic Benefits
First, DB plans offer the highest tax-deductible contribution limits of any retirement plan, often exceeding $200,000 per year. Second, they can be combined with a 401(k) for even greater tax savings. For profitable business owners over 40, this combination can be one of the most powerful tax reduction strategies available.
Is a DB Plan Right for Your Business?
DB plans work best for business owners with consistent high income, few employees, and a desire to accelerate retirement savings. We help you model the numbers, design the plan, and manage the ongoing administration. Find out if a DB plan fits your situation.
Who This Is For
- Profitable business owners over 40 with consistent high income who want to accelerate retirement savings
- Owners with few or no employees who can support a large annual contribution
- Owners seeking the largest tax-deductible retirement contribution available, often well above a 401(k)
- Owners open to combining a defined benefit plan with a 401(k) for greater tax savings
- Owners with irregular or uncertain income who cannot commit to a required annual contribution
- Businesses with many employees, where required contributions for staff can outweigh the benefit
- Owners who want the flexibility to skip or vary contributions from year to year
- Owners looking for a one-time write-off or a pure tax dodge, rather than a committed, multi-year retirement plan
Risks, Costs, and What to Weigh
- A defined benefit plan generally requires a committed, recurring annual contribution; it is far less flexible than a 401(k).
- If you have employees, the plan may require meaningful contributions on their behalf, which changes the math.
- Defined benefit plans carry actuarial, administration, and compliance costs that a 401(k) does not.
- Contribution and benefit limits depend on your age, income, and plan design; the numbers must be modeled for your specific facts.
Defined Benefit Plan vs. 401(k)
How a defined benefit plan compares with a 401(k) for a business owner.
| Feature | Defined benefit plan | 401(k) plan |
|---|---|---|
| Annual deductible contribution | Often $100,000 to $200,000 or more | Lower, set by statutory limits |
| Contribution flexibility | Committed, recurring annual contribution | Flexible from year to year |
| Investment flexibility | Often a much wider range of assets than a typical 401(k), including alternatives, subject to fiduciary, prudence, and diversification rules | Usually limited to the plan's preset fund menu |
| Professional management | The sponsor can hire professional managers to run the plan's pooled assets | Participants usually self-direct within the menu; professional management is limited or hard to arrange |
| Ongoing cost and complexity | Actuarial, administration, and compliance costs | Lower administrative burden |
| Best-suited owner | Profitable owners over 40, high income, few employees | A broader range of businesses and employees |
The two can also be combined, and actual limits must be modeled for your specific facts.
Written by: Stefan Whitwell, CFA®, CIPM
Reviewed by: Rosemary Wright, CFP®
Last updated:
Sources (verified):
- Internal Revenue Service, Defined Benefit Plan
- Internal Revenue Service, Retirement Topics — Defined Benefit Plan Benefit Limits