Defined Benefit

What it is

A Defined Benefit plan is a retirement vehicle available to self-employed business owners. It’s the older pension model — the “defined benefit” refers to the fact that you define the benefit you want at retirement and work backward to figure out how much you can contribute each year to fund it.

The big thing: contribution limits are much higher than a solo 401k or IRA. Depending on age, income, and what benefit you’ve defined, annual contributions can run well into six figures, all pre-tax. That’s the lever. If you’re pulling real income out of an opco — construction profits, wholesale fees, brokerage commissions — a Defined Benefit plan can absorb a lot of it before it ever hits your tax return.

Why it matters

Flippers get squeezed on taxes. If the only tool you have is a solo 401k, you cap out at a certain contribution. Stack a Defined Benefit plan on top and suddenly you can shelter multiples more per year. The tradeoff is complexity — you need an actuary to set it up and file the annual report — so it’s typically only worth the administrative overhead when your taxable income is consistently high.

I run a Defined Benefit plan alongside a solo 401k and IRA. The structure is intentional: the holdco/opco setup routes income through the opco where these vehicles live. Pay the opco for construction, brokerage, or acquisitions, take a profit in the opco, then sock a large chunk of that profit into the retirement accounts before it gets taxed. Out of a $91K total deal profit, the opco side pays around $10K in taxes after the IRA, solo 401k, and business expenses — versus $45K if you ran everything through a simple structure.

The self employment tax issue is separate but related: a Defined Benefit plan reduces income taxes, not SE tax. You still need an S-Corp election or similar structure to address SE tax.

How it shows up

High-earning solo operators who have been in the game long enough to generate consistent opco income. You’re not setting this up in year one. You set it up when your opco is reliably profitable and your CPA starts saying things like “you’ve maxed out your 401k, what else can we do?”

The spouse angle matters too. Lisa’s brokerage has a solo 401k. That’s a separate vehicle. Between two entities and the Defined Benefit plan, there’s a lot of room to move money into retirement-sheltered accounts before it becomes taxable income.

Related

Solo 401K, holdco opco, self employment tax, depreciation, taxes, wealth engines