Retire Better: The Hidden Advantages of the Defined Benefit Plan
- Viktoriya Barsukova, EA, MBA
- Aug 15
- 3 min read
If you’re a high-income solo business owner, you’ve probably maxed out the usual retirement vehicles—like SEP IRAs or solo 401(k)s. But what if you could contribute two, three, or even four times more each year, while dramatically reducing your tax bill?
Enter the defined benefit plan—a powerful yet often overlooked retirement strategy that’s not just for large corporations or government employees. For self-employed professionals and sole owners of corporations—especially those 50+ with steady, high incomes—this plan can be a game-changer.
What Makes a Defined Benefit Plan Different?
Unlike defined contribution plans, which have strict annual limits, a defined benefit plan promises a fixed, pre-established benefit at retirement. Your annual contribution is calculated by an actuary based on:
Your age
Your income
Your target retirement date
The benefit you want to receive
2025 IRS Limits:
Up to $280,000 per year in retirement benefits funded
Up to $3.5 million total plan accumulation
Compensation considered up to $350,000
Because contributions are designed to fund a specific benefit, they can be much higher than other plan types—often exceeding $70,000 annually and, in some cases, $300,000 or more.
Why Consider a Defined Benefit Plan?
You might be a strong candidate if you are:
50 or older
Earning consistent six- or seven-figure income
Wanting to contribute more than $70,000 annually
Able to commit to multi-year contributions
For example:
A business owner earning $1 million annually could contribute $300,000 a year to a defined benefit plan—cutting federal taxes by over $100,000 while building a large retirement nest egg quickly.
The Tax Advantages
Massive Tax-Deductible Contributions
Employers can deduct contributions up to the plan’s unfunded liability.
Contributions reduce your taxable income, often resulting in five- or six-figure tax savings each year.
Accelerated Retirement Savings
Particularly powerful for older business owners nearing retirement who want to “catch up” in a short timeframe.
Predictable, Guaranteed Benefit
The benefit is not tied to investment returns, giving you certainty in retirement income planning.
Administrative Requirements
With greater benefits come greater responsibilities:
Annual Actuarial Certification – An enrolled actuary must calculate and certify funding requirements.
Form 5500 Filing – With Schedule SB signed by the actuary.
Minimum Funding Standards – Failure to meet them may trigger excise taxes under IRC §4971.
Ongoing Costs – Typically $1,000–$4,000 per year for plan administration and actuarial services.
Key Advantages
High contribution limits unmatched by SEP IRAs or solo 401(k)s.
Accelerated savings potential for late starters.
Tax deferral on growth until retirement withdrawals.
Predictable retirement benefit, independent of market volatility.
Potential Drawbacks
Higher setup and maintenance costs than other plans.
Multi-year funding commitment—you can’t easily stop contributions without plan termination.
Funds are locked until retirement age, with penalties for early withdrawal.
Complex compliance requirements that require expert help.
Bottom Line
For a high-income solo business owner, a defined benefit plan can be the ultimate tax and retirement savings accelerator—allowing you to put away hundreds of thousands of dollars annually, slash your tax bill, and secure a substantial retirement income.
But these plans aren’t DIY. The complexity and costs mean you’ll need to work closely with a tax professional and enrolled actuary to design, implement, and maintain the plan—ensuring you get maximum benefits while staying fully compliant.
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