The Tax Advantages of Defined Benefit Plans Explained
Most retirement planning conversations start with a familiar goal: grow your nest egg for the future. But for high-income professionals—doctors, lawyers, dentists, and small firm owners—there’s a second, equally powerful objective: reduce current tax liability. Defined benefit (DB) plans allow you to do both.
These plans aren’t just about retirement security—they are among the most powerful tax planning tools available in the IRS code. With contribution limits far above what’s allowed in IRAs or 401(k)s, DB plans let you shift large portions of your income into a qualified retirement vehicle, deferring income taxes and potentially reducing your total tax bill by tens or even hundreds of thousands of dollars each year.
In this chapter, we break down the specific tax advantages of defined benefit plans. We’ll explain how contributions are treated from a business tax perspective, how they affect individual tax returns, how DB plans interact with other qualified plans, and how smart structuring can help you minimize taxes now and in the future.
The Tax Deduction: A Strategic Reallocation of Income
Let’s start with the core concept: contributions to a defined benefit plan are tax-deductible business expenses.
If you’re self-employed or own a professional practice, your contributions to the plan reduce your business's taxable income. Whether you file as an S-Corp, C-Corp, partnership, or sole proprietorship, the business receives a deduction for the full amount of the DB plan contribution.
That deduction flows through to the individual owners, reducing their adjusted gross income (AGI) and, in turn, their personal income tax burden.
Here’s a simplified example:
Dr. Taylor's Practice:
Net income before retirement contributions: $500,000
Defined benefit plan contribution: $200,000
New taxable income: $300,000
Estimated tax savings (federal + state): ~$80,000
That’s $80,000 in taxes saved—every year—while simultaneously growing retirement wealth in a tax-deferred environment.
Now multiply that by a 10–15 year retirement runway. You’re looking at seven figures in total tax savings.
Corporate vs. Individual Tax Impact
Depending on how your business is structured, the impact of the contribution may be realized at the corporate or individual level—or both.
Sole Proprietor / Single-Member LLC:
Contributions are made directly by the business owner.
The deduction appears on Schedule C, reducing self-employment income.
Both federal income tax and self-employment tax are reduced.
S-Corporation or Partnership:
The business makes contributions on behalf of owners and employees.
Contributions reduce business income before it flows through to the owners.
The result is a lower K-1 income on the individual tax return.
C-Corporation:
The corporation deducts contributions at the entity level.
Owners who receive W-2 compensation see no impact to their reported salary but benefit from the plan’s funding of their future retirement.
In all structures, the business gets the deduction, and the owner gets the retirement benefit—making DB plans uniquely efficient tools for professionals who own their business.
How Tax Deferral Amplifies Growth
The benefits of DB plan contributions don’t stop with the initial deduction. Because the assets inside a DB plan grow tax-deferred, you avoid paying taxes on interest, dividends, and capital gains while the money compounds.
Over time, this makes a significant difference. Consider the following:
Scenario Annual Contribution Growth Rate Tax Treatment Value After 15 Years Taxable Brokerage Account $150,000 6% Annual taxes on gains ~$2.7 million Defined Benefit Plan (Tax-Deferred) $150,000 6% No taxes until distribution ~$3.6 million
That’s nearly $1 million more in total value simply due to tax deferral and compounding.
And unlike Roth accounts, DB plans don’t have income limits. High earners are not excluded. In fact, they’re the ideal candidates.
Layering with a 401(k): The Double Benefit
Another unique advantage of defined benefit plans is that they do not replace or interfere with your ability to contribute to a 401(k) plan. In fact, you can—and should—do both.
When structured correctly, your business can sponsor both a DB plan and a 401(k) with profit-sharing. Here’s what that looks like in practice:
Plan Type Max Contribution (Age 50+) 401(k) (Employee Deferral) $23,000 (2025 limit) 401(k) (Employer Match/Profit Sharing) $46,000 Defined Benefit Plan $100,000–$300,000+ Total Possible $170,000–$370,000+
All of those contributions are deductible to the business and tax-deferred to the individual.
This approach is especially effective for:
Practice owners with volatile income (contribute more in high-income years)
Partners nearing retirement who want to "catch up"
Businesses looking to create owner-favorable plans while offering minimal but compliant benefits to staff
Our firm helps you layer these plans seamlessly, coordinating compliance testing and ensuring you’re taking full advantage of both sets of limits.
Tax Impact on Employees and Staff Contributions
One common question we hear is: “What about my staff—do their benefits affect my deduction?”
The answer is yes, but in a good way.
When you include employees in your DB plan (which is usually required for compliance), their benefit accruals are also deductible to the business.
Let’s say you run a small dental office and your staff receives a combined $40,000 in annual DB contributions. That amount is added to your total deduction—lowering your business’s taxable income further.
And because we design plans with cost control in mind, staff contributions typically represent just 5–10% of payroll, while allowing you to maximize your personal contribution.
Best of all, staff members benefit from professionally managed, guaranteed retirement income—boosting morale and reducing turnover. It’s a win-win.
State and Federal Tax Synergy
Defined benefit plans offer advantages on both federal and state tax levels.
Federal:
Contributions reduce adjusted gross income (AGI)
May reduce exposure to the 3.8% Net Investment Income Tax (NIIT)
Potentially reduces Medicare surtaxes
State:
Many high-income states (e.g., California, New York) tax income at 8–13%
DB contributions reduce taxable state income as well
This compounds the overall tax savings dramatically
For professionals in high-tax states, the benefit of DB contributions is even more pronounced.
Timing Matters: End-of-Year Contributions and Retroactive Setup
One of the most powerful (and underutilized) strategies with DB plans is the ability to backdate contributions for tax planning purposes.
If you establish a DB plan before the end of your tax year (or by the extended tax filing deadline in some cases), you may be able to:
Deduct the contribution for the prior year
Fund the contribution after the close of the year
Adjust the amount based on final business income and cash flow
Our firm works closely with your CPA to optimize contribution timing. This is especially valuable when your income varies or you have unexpected profits late in the year.
It’s one more reason to work with a firm that understands the coordination between tax law and pension design.
What Happens When You Retire?
Eventually, your DB plan will stop accepting contributions and begin paying out benefits. At that point, distributions are taxed as ordinary income, just like a traditional IRA or 401(k). But there are smart ways to manage the tax impact:
Roll your lump sum into an IRA to continue deferral
Take distributions gradually to manage tax brackets
Pair withdrawals with Roth conversions or charitable giving
Time plan termination to coincide with lower-income years
We help you design a personalized exit and rollover strategy that maximizes long-term wealth and minimizes unnecessary taxes.
Summary: Why DB Plans Are a Tax Strategist’s Best Friend
Let’s recap the core tax benefits of defined benefit plans:
✅ Massive Contribution Limits – $100k–$300k+ per year, depending on age and income
✅ Full Deductibility – Contributions reduce business income dollar-for-dollar
✅ Tax-Deferred Growth – Assets grow without capital gains or income tax
✅ Lower Individual AGI – Reduces exposure to surtaxes, phaseouts, and state income tax
✅ Layered with 401(k) – Stackable contributions for maximum savings
✅ Flexible Timing – Backdated setup and customizable contributions
✅ Rollover-Friendly – Assets can move into IRAs at retirement to maintain tax deferral
In short, there’s no better tax planning tool for high-income professionals looking to accelerate retirement savings while slashing their current tax bill.
And the best part? You don’t have to navigate it alone.