Definition
A defined benefit plan is a retirement plan that promises a set benefit at retirement, allowing very large tax-deductible contributions for high earners.
How It Works
Unlike a 401(k), which defines what goes in, a defined benefit plan defines the future benefit and works backward to required contributions, which can be very large for older, high-income owners. Contributions are deductible to the business and grow tax-deferred. The cash balance plan is a popular modern variant.
Example
A successful solo professional in their fifties contributes well over $200,000 a year to a defined benefit plan, deducting the full amount.
When It Works Best
It works best for highly profitable businesses with few employees and older owners seeking to shelter large amounts quickly before retirement.
Who It Applies To
Business owners and self-employed professionals with strong, consistent income.
Watch-Outs
Contributions are largely required once set, the plan must fairly cover eligible employees, and it requires actuarial work and ongoing administration.
