A Retirement Plan Contribution of $350,000 is Possible

Defined benefit plans are a powerful retirement savings tool, offering significantly higher contribution limits than other retirement plans like 401(k)s. I have seen deductible contributions as high as $350,000 for a single year.  These specific types of plans allow business owners, especially those nearing retirement, to hyper-accelerate their retirement savings in a tax-advantaged way. Here’s a closer look at how defined benefit plans work, the benefits for businesses with different employee structures, and what to consider regarding costs.

High Contribution Limits: How Defined Benefit Plans Work

One of the most compelling aspects of defined benefit plans is the high contribution ceiling. Contribution amounts are calculated based on factors like age, income, and target retirement benefits, meaning older business owners or those with higher incomes can often contribute substantially more compared to other plan options. For instance, while 401(k) contributions max out around $66,000 for those 50 and older (with catch-up contributions), defined benefit plans can allow contributions that exceed six figures annually, depending on the owner’s age and retirement goals.

Defined Benefit Plans for One vs. Multiple Employees

A defined benefit plan can be a valuable tool for solo business owners, providing a highly personalized retirement savings solution without the need to extend benefits to additional staff. However, for businesses with multiple employees, there is a commitment to fund similar benefits for all eligible employees, which can increase both the complexity and cost of managing the plan. Employers with a small workforce may find defined benefit plans particularly advantageous when they want to support employee retirement planning as part of a broader talent-retention strategy, but in companies with non-owner employees, the cost can be quite prohibitive.  It’s a no-brainer for high earning self-employed, but you will want to do the math if you have employees.

Costs of Operating a Defined Benefit Plan

Setting up and maintaining a defined benefit plan does come with higher costs compared to other retirement plans. These plans require annual actuarial services to determine funding levels (typically around $5,000 per year), as well as adjustments to account for factors like investment returns and the plan’s funding status. Additionally, the business must make consistent annual contributions to ensure the plan remains fully funded – that is, you can’t take a year off. Typical costs include both initial setup fees and ongoing maintenance expenses, which can easily range into the thousands annually.

Benefits of Defined Benefit Plans

Despite the costs, defined benefit plans offer unique tax and retirement benefits. Contributions made by the business are tax-deductible, reducing taxable income and providing immediate financial advantages. For high-income earners, defined benefit plans represent an opportunity to defer a substantial amount of income, which can be particularly advantageous as they approach retirement. For companies with employees, offering a defined benefit plan can be an effective retention tool, enhancing long-term employee loyalty by providing a stable retirement option.