Why Entrepreneurs Should Have a Defined Benefit Plan

If you’re a high-income solo business owner, there’s a lesser-known retirement strategy that can dramatically boost your savings while reducing your tax bill: the defined benefit plan.

While often linked to large corporations or public sector jobs, defined benefit plans can be an exceptional tool for self-employed professionals and sole owners of corporations. It is especially beneficial for those earning steady six- or seven-figure incomes and approaching retirement. Unlike SEP IRAs or solo 401(k)s, which limit how much you can contribute each year, a defined benefit plan allows for significantly larger, tax-deductible contributions based on the retirement benefit you want to secure.

Who Should Consider It?

A defined benefit plan might be worth exploring if you:

• Are age 50 or older
• Earn consistent, high income
• Want to contribute more than $70,000 annually
• Can commit to multi-year contributions

For example, a business owner earning $1 million per year might contribute $300,000 annually—potentially lowering their federal tax bill by more than $100,000.

How It Works

Your annual contribution is calculated by an actuary to factor in your age, income and desired retirement date. For 2025, the IRS guidelines allow:

• Funding of up to $280,000 per year in retirement benefits
• A total plan accumulation of up to $3.5 million
• Contributions based on compensation up to $350,000

These generous limits make defined benefit plans one of the most powerful retirement savings and tax-deferral options available to high-income earners.

Key Considerations

Defined benefit plans do come with commitments and costs. Setup and administration require annual actuarial evaluations and filings, typically costing between $1,000 and $4,000 per year. Contributions must continue for several years, and funds are generally locked in until retirement. Early withdrawals can trigger penalties.

Still, the advantages are compelling:

• Larger tax-deductible contributions than other retirement plans
• Significant tax savings in high-income years
• A clear, predictable path to a secure retirement income

The Bottom Line

If you have high, stable income and want to maximize both your retirement savings and your tax efficiency, a defined benefit plan can be a game-changing strategy. By working with a knowledgeable advisor and an experienced actuary, you can structure a plan that aligns with your goals and timeline—turning today’s earnings into tomorrow’s financial security.

To learn more about this strategy and other wealth management techniques to benefit entrepreneurs, contact Illumination Wealth today.