The Ultimate Guide to Defined Benefit Plans for the Self-Employed
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“For the right self-employed professional, a defined benefit plan is the single most powerful retirement and tax tool available. The ability to contribute hundreds of thousands per year—fully deductible—while locking in guaranteed future income is a game-changer.”
— Daniel Levin, Venture Partner at Defined Benefits Group
For self-employed individuals—doctors, dentists, consultants, lawyers, and business owners—finding the right retirement plan isn’t just about saving for the future. It’s also about maximizing tax deductions, accelerating wealth accumulation, and safeguarding financial security. One often-overlooked but incredibly powerful tool is the Defined Benefit (DB) Plan.
While 401(k)s and IRAs dominate the conversation around retirement, DB plans offer dramatically higher contribution limits—especially advantageous for high earners in their 40s, 50s, or 60s who are looking to "catch up" on retirement savings. This article walks through how self-employed professionals can use defined benefit plans to their advantage.
What Is a Defined Benefit Plan?
A Defined Benefit Plan is a qualified retirement plan that guarantees a specific payout at retirement—usually based on a formula involving age, compensation, and years of service. Unlike Defined Contribution plans (e.g., 401(k)s), where retirement income depends on investment performance, a DB plan promises a fixed benefit.
Key Characteristics:
Employer-funded (in self-employed setups, you are the employer).
Actuarially calculated annual contributions.
Contributions are tax-deductible to the business.
Benefits are guaranteed regardless of market performance.
Plans are regulated by the IRS and may be covered by PBGC (though not always for solo plans).
Why Self-Employed Professionals Should Consider a DB Plan
Self-employed individuals often face unique challenges:
Irregular income streams.
Lack of access to corporate retirement plans.
Higher tax burdens without W-2 shelters.
A Defined Benefit Plan addresses many of these head-on. The biggest draw? Massive contribution limits.
High Contribution Limits
Unlike SEP IRAs or solo 401(k)s, which cap out around $66,000–$73,500 annually (including catch-ups), defined benefit plans allow for annual contributions of $100,000 to $300,000+, depending on age and income. A 55-year-old high earner might be able to contribute—and deduct—over $250,000 per year.
Tax Efficiency
All contributions are fully tax-deductible, significantly lowering your current-year taxable income. This is especially beneficial in high-tax states like California or New York.
Accelerated Retirement Savings
Self-employed professionals often delay saving for retirement while building their practice or business. A DB plan offers a way to make up for lost time by supercharging retirement contributions in the final 10–15 years of work.
Who Is a Good Candidate?
Defined Benefit Plans aren’t for everyone. They're ideal for:
Self-employed individuals over 40.
High and stable annual income (e.g., $200,000+).
Desire to contribute more than the limits of a 401(k) or SEP IRA.
Business owners with no or few employees (to avoid complex nondiscrimination testing).
Professionals seeking a large annual tax deduction.
Examples include:
A 50-year-old dentist with $450,000 in annual net income.
A freelance consultant with consistent six-figure income and no employees.
A law firm partner looking to shield earnings from high tax brackets.
How It Works: Contributions and Payouts
The Formula
The retirement benefit is based on a fixed formula, often:
Benefit = (Highest 3-Year Average Compensation) × (Years of Service) × (Multiplier)
The IRS caps the annual benefit at $275,000 for 2024 (indexed annually). Based on your age and desired retirement age, an actuary calculates the annual contribution needed to fund this benefit.
Funding Schedule
You’re required to contribute each year based on the actuarial calculation. Contributions must be made by your business’s tax filing deadline, including extensions.
The older you are, the more years you’ve worked, and the higher your income, the higher your allowable contribution.
How to Set It Up
Hire a Pension Actuary or Third-Party Administrator (TPA)
They design the plan, run the numbers, and help ensure compliance.Set Up a Trust Account
Contributions must go into a separate retirement trust account—not your brokerage or personal accounts.Create and File the Plan Documents
Your TPA will help file Form 5500 and other IRS-required documents.Invest the Funds Prudently
The plan trustee (typically you) invests the assets according to plan goals and risk tolerance.Maintain and Review Annually
Annual actuarial valuations are required to determine the minimum contribution and track funding.
Integration with Other Retirement Plans
One of the biggest advantages? You can pair a defined benefit plan with a solo 401(k). This allows:
Up to $66,000–$73,500 in a 401(k) (with profit sharing and catch-up).
Plus $100,000–$300,000+ in the DB plan.
That means total annual retirement contributions north of $400,000—with full deductibility.
What About Employees?
If you have employees, the plan gets more complex. You may be required to contribute on their behalf to satisfy IRS nondiscrimination rules. Solutions include:
Using a Cash Balance Plan (a DB plan with individual hypothetical accounts).
Employing comparability testing with a 401(k).
Restricting eligibility to employees after 1-2 years of service.
If you’re solo or have a spouse as the only “employee,” your plan remains relatively simple and affordable.
Tax and Legal Considerations
Contributions are deductible on your Schedule C or business return (S-Corp, LLC, etc.).
Distributions are taxed as ordinary income, similar to IRAs.
The plan can be rolled into an IRA upon retirement or plan termination.
Plan documents must comply with IRS and ERISA regulations.
Failing to make contributions or file necessary forms (like Form 5500) can result in penalties, so it’s essential to work with experienced plan administrators.
Real-World Example
Dr. Angela, a 52-year-old orthopedic surgeon, is self-employed and earns $600,000 annually. She’s behind on retirement and wants to contribute aggressively for the next 10 years.
Her advisor sets up a defined benefit plan with a $265,000 annual contribution and a solo 401(k) for an additional $30,000. Over a decade, she’ll defer $2.95M into retirement savings—most of it tax-deductible.
By age 62, her retirement fund could exceed $4 million, even with conservative investments.
When to Avoid a Defined Benefit Plan
A DB plan may not be right if:
Your income is highly variable or unpredictable.
You’re younger with plenty of time to contribute to a 401(k) or IRA.
You’re uncomfortable with the required annual funding obligation.
You want more investment flexibility or prefer Roth-style growth.
In these cases, a solo 401(k) or SEP IRA might be more appropriate.
How to Exit or Freeze a DB Plan
Plans can be terminated or frozen if circumstances change. Here’s how:
Freezing stops future accruals but preserves existing benefits.
Terminating allows you to distribute the funds to an IRA or annuity.
You’ll need an actuary to certify that the plan is fully funded before termination.
Termination often happens during business transitions or retirement. It’s best done with guidance from your plan administrator and CPA.
Costs to Set Up and Maintain
Set-Up Fee: $1,500–$3,000 (one-time)
Annual Administration: $1,500–$3,000
Actuarial Valuation: Included or charged separately
Custodian Fees: Depends on investment firm
Though not cheap, the tax savings often dwarf the costs. A $250,000 contribution at a 40% marginal rate saves $100,000+ in taxes—making the fees well worth it.
Final Thoughts
For self-employed professionals with strong income and a desire to maximize retirement savings—and minimize tax exposure—the Defined Benefit Plan is a hidden gem. It’s not a “set-it-and-forget-it” plan like an IRA, but with the right guidance, it offers unparalleled savings potential, security, and flexibility.
As always, consult with a qualified TPA, actuary, and tax advisor before implementing or connect with Defined Benefits to get your questions answered!