Supercharge Your Retirement Savings with a Defined Benefit Plan
When most business owners think about retirement planning, they usually picture 401(k)s, IRAs, or maybe a SEP IRA. These are good tools—but for successful entrepreneurs and professionals with strong cash flow, these plans often don’t allow enough tax-deferred savings to match their income or late-career goals.
Enter the Defined Benefit (DB) Plan—a retirement savings powerhouse that can supercharge your contributions and turbocharge your tax deductions. While traditional retirement plans cap contributions in the tens of thousands, defined benefit plans can allow business owners to contribute hundreds of thousands of dollars each year, depending on their age and income.
In this article, we’ll explore how defined benefit plans work, how they compare to other retirement vehicles, and how they can give business owners a major edge in building wealth—especially in the years leading up to retirement.
The Basics: What Is a Defined Benefit Plan?
A defined benefit plan is a type of retirement plan that guarantees a fixed income in retirement. Unlike 401(k)s or IRAs, where the final balance depends on how well your investments perform, a DB plan promises to pay you a set monthly amount based on a formula that considers your age, compensation, and years of service.
It’s the structure behind traditional pensions—but the good news is that you don’t have to be a Fortune 500 company to set one up. Small businesses, partnerships, and solo practitioners can all use defined benefit plans to secure future income and unlock significant tax benefits today.
Why Business Owners Love Defined Benefit Plans
For high-income business owners, the biggest advantage of a defined benefit plan is the sky-high contribution limits. Unlike IRAs and 401(k)s, which have rigid caps, DB plan contributions are based on how much is needed to fund your promised benefit at retirement.
Let’s compare:
Traditional IRA: $7,000 per year ($8,000 if age 50+ in 2025)
401(k) Plan: $23,000 per year ($30,500 if age 50+ in 2025)
SEP IRA: Up to 25% of compensation, maxing at ~$69,000
Defined Benefit Plan: $100,000–$300,000+ per year, depending on your age, income, and retirement target
The older you are and the more income you earn, the more the IRS allows you to contribute—because there’s less time to grow your balance before retirement. That makes DB plans especially attractive for owners aged 45 to 65 who want to make up for lost time and lock in a larger nest egg, fast.
Real Example: A High-Earning Business Owner
Imagine a 55-year-old small business owner earning $400,000 annually. She’s already maxing out her 401(k) and profit-sharing contributions, but wants to put more aside for retirement while reducing her tax liability.
By adopting a defined benefit plan, she may be able to contribute $200,000+ per year pre-tax—far more than what other plans allow. Over 10 years, that's $2 million in contributions, all compounding tax-deferred and potentially saving her hundreds of thousands in federal and state income taxes.
Now imagine combining this with a solo 401(k) or safe harbor profit-sharing plan. That’s where things really start to snowball.
The Tax Efficiency Advantage
DB plans don’t just let you save more—they help you save smarter.
Here’s why:
All contributions are tax-deductible to the business
The plan assets grow tax-deferred
Distributions in retirement are taxed as ordinary income—when you’re likely in a lower tax bracket
For high-income earners in states like California or New York, where combined federal and state tax rates can approach 50%, the immediate savings can be enormous. Each $100,000 in contributions could be cutting your current-year tax bill by $40,000 to $50,000.
Who’s a Good Fit for a Defined Benefit Plan?
Defined benefit plans aren’t for everyone—but for the right profile, they’re a game-changer.
You’re a great candidate if:
You’re a business owner or self-employed
You’re age 45 or older
You have consistently high income ($250K+ ideally)
You want to contribute more than $69,000/year
You’re looking for large tax deductions
You plan to retire in 5–15 years
You have few employees or are willing to fund plans for key team members
Even small businesses with one or two employees—such as medical, legal, or consulting practices—can benefit. A well-structured plan can reward key staff while focusing most of the contributions on the owner(s).
Combining with Other Plans: The “Combo Strategy”
One of the most effective ways to use a defined benefit plan is to combine it with a 401(k)/profit-sharing plan. This lets you stack even more tax-deferred contributions in a single year.
For example, a 58-year-old business owner could:
Contribute $265,000 to a defined benefit plan
Add another $30,500 to a solo 401(k)
Add $23,000 to a profit-sharing plan
Total? Nearly $320,000 in tax-deductible savings in one year.
The IRS allows this as long as the plans are set up correctly and compliance testing is met. With the help of a third-party administrator (TPA) or actuary, this strategy is perfectly legal and very effective.
Administrative Requirements: What You Need to Know
Because defined benefit plans are more complex, they come with some additional requirements:
Annual Contributions Are Expected
You must contribute consistently—though plans can be frozen or terminated with proper notice.You’ll Need an Actuary
A certified actuary must calculate your annual contribution to keep the plan compliant with IRS regulations.There Are Annual Filing Requirements
You’ll file a Form 5500 and receive annual plan valuations.Plans Are Typically Long-Term Commitments
Ideally, you should plan to fund the DB plan for at least 3–5 years to get the most benefit and avoid early termination penalties.
However, the administrative cost—typically between $2,000 and $5,000 per year—is often a drop in the bucket compared to the tax savings and wealth accumulation it enables.
What Happens at Retirement?
Once you retire (or terminate the plan), you have several options:
Roll the balance into an IRA, deferring taxes until you withdraw
Take monthly payments from the plan, like a traditional pension
Use a mix of lump-sum and annuitized distributions
Most business owners choose to roll their DB balance into an IRA, giving them full control over the investments and continued tax deferral. This also helps preserve the flexibility to manage taxes in retirement.
Common Misconceptions
Let’s clear up a few myths:
“DB plans are only for big companies.”
Not true—many solo business owners and small practices use them very effectively.“They’re too complicated.”
They do require administration, but with the right advisor or actuary, it’s very manageable—and worth it.“You’re locked in forever.”
While consistent funding is ideal, you can freeze or terminate the plan when needed, with professional guidance.
Building a Tax-Efficient Retirement Strategy
Here’s the bigger picture: Defined benefit plans aren’t just about saving money. They’re about aligning your business success with your long-term financial goals.
By supercharging your annual retirement contributions, you can:
Shelter more of your income from taxes
Catch up quickly if you started saving late
Guarantee yourself a secure retirement income
Leave a legacy for your family or business succession
Pair that with smart estate planning, tax-efficient distributions, and possibly Roth conversions in retirement, and you have a complete, powerful strategy for long-term wealth.
If you’re a business owner earning strong, consistent income—and especially if you’re over 45—defined benefit plans deserve your attention. They’re not just for massive corporations. In fact, they’re one of the most powerful, underutilized tools available to small businesses and high-income professionals.
With the ability to contribute three to five times more than a 401(k), a DB plan can significantly accelerate your retirement savings while slashing your tax bill. The setup is more involved, yes—but for many, the rewards far outweigh the effort.
As with any sophisticated financial strategy, it’s smart to consult with a qualified retirement advisor, actuary, or CPA to see what’s possible for your business.
Because if you're working this hard to build wealth, you deserve a retirement plan that works just as hard for you.