Defined benefit plans are far less common than they used to be. However, for those who are able to take advantage of one, a defined benefit plan can be an important step in the path to building long-term wealth.
Many of the businesses and financial advisors I work with have a general sense of how defined benefit plans work. But they don’t often have an in-depth familiarity with the advantages these plans can bring to their clients.
In this article, I take you through some of the key strategic uses of defined benefit plans.
1. Helping Clients Smooth Out Income in Their Peak Earning Years
For many business owners and high-earning professionals, some years are more lucrative than others. When business owners offer their employees defined benefit plans, employees may be able to make large tax-deductible contributions during these years.
This strategy can keep employees from being pushed into a higher tax bracket, potentially saving employees thousands of dollars.
2. Making it Easier for Clients to Shield Income During High-Tax Years
Defined benefit plans are tax-deferred retirement accounts. If taxable income is lower when the account holder makes withdrawals, they can save a significant amount in taxes by contributing to the plan during their high-income years.
3. Leveraging Deductible Contributions Before a Business Sale
When business owners are looking to sell, move to a new venture, or retire, defined benefit plans may make a meaningful difference in their exit plan.
When set up correctly, contributions to defined benefit plans could actually increase the likelihood of a sale. A business owner’s contributions to their own defined benefit plan may lower their business’s total valuation while also lowering its tax liability for the year. Both of these effects may make the company more attractive to potential buyers.
4. Taking Advantage of Catch-Up Acceleration
“Catch-up” and “super catch-up” contributions allowed for IRAs and 401(k)s are designed to help people who are nearing retirement catch up on savings.
The baseline 401(k) contribution maximum is $24,500 for 2026. The standard catch-up for people over 50 is an additional $8,000. For those aged 60 to 63, it’s $11,250.
These catch-up increases are a useful tool for many people in preretirement. However, most high earners are looking to save even more. Defined benefit plans allow for considerable contribution acceleration, especially if they’re set up later in life.
The amount an account holder is allowed to contribute is determined by an actuarial calculation, but it’s not unusual for older business owners to contribute $200,000 or more per year.
5. Coordinating Plan Strategy With Succession and Estate Planning
Defined benefit plans offer a good amount of flexibility. And if an account holder successfully coordinates their retirement plan with their business succession and estate planning strategies, they may be better set up to enjoy a well-funded retirement.
For example, if a business owner plans to pass the company down to a family member, they may opt to stay on for a few more years to increase contributions to their defined benefit plan.
Many defined benefit plans also allow account holders to take a lump-sum distribution when they first retire. Financial planners who help their clients to coordinate this distribution with their retirement date can help smooth out the transition.
Want to Learn More About Defined Benefit Plans?
Defined benefit plans can be excellent tools for retirement savings. However, many people don’t know how to take advantage of them. At FinancialFocus Retirement Plan Services, we offer personalized guidance to help our clients design and implement pension plans.
If you have questions about defined benefit plans and how we may be able to help, contact us online or email me today at info@ff401k.com.
About Kenny Phan
Kenny Phan is a Managing Partner/Pension Consultant at FinancialFocus Retirement Plan Services. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses around the nation, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.