When business owners think about retirement savings, 401(k) plans usually come to mind first. But for high-earning professionals and business owners looking to save aggressively — and reduce taxable income significantly — defined benefit plans deserve a second look.
What Is a Defined Benefit Plan?
Unlike a 401(k), where contributions and investment performance determine your eventual balance, a defined benefit plan works in reverse. It guarantees a specific retirement benefit, calculated using a formula based on factors like salary history, age, and years of service. Your accountant and actuary then determine how much must be contributed each year to fund that promised benefit.
Why Business Owners Are Paying Attention
For owners in their 40s, 50s, or 60s who are behind on retirement savings, defined benefit plans allow contributions far exceeding 401(k) limits — sometimes well over $200,000 annually, depending on age and income. Because these contributions are tax-deductible business expenses, the plans offer a dual benefit: accelerated retirement savings and meaningful tax reduction in high-income years.
Who Should Consider One?
These plans work best for:
- Business owners with stable, predictable income
- Professionals nearing retirement who want to catch up quickly
- Companies with few employees, where funding costs are more predictable
They require more administrative oversight than a 401(k), including annual actuarial calculations and mandatory funding commitments, so they’re not right for every business.
The California Angle
With California’s high state income tax rates, the tax-deferral benefits of a defined benefit plan can be especially valuable for local business owners and independent professionals.
Talk to a Professional
Defined benefit plans aren’t one-size-fits-all. At Easy Bay Accounting, we help California business owners evaluate whether this strategy fits their financial goals, cash flow, and timeline. If you’re looking to maximize retirement savings while minimizing your tax bill, it may be time to explore your options.
Call us today at (925) 421-2202 to schedule a consultation.
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