Defined Benefit Plans: How Solo Entrepreneurs Can Deduct $200,000+ Annually
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Result: Saved $80,000 in taxes this year alone.
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Defined Benefit Plans: How Solo Entrepreneurs Can Deduct $200,000+ Annually
CORE INSIGHTS
- The Nuclear Option: A Solo Defined Benefit Plan allows older, high-income owners to contribute $100k-$300k annually, tax-deductible. It is the most powerful shelter in the US tax code.
- Age is Leverage: Limits are based on age and income. The closer you are to retirement, the more the IRS lets you save to hit a “Target Benefit” (e.g., $275k/yr).
- Permanent Savings: By slashing taxable income by $200k+, you save income tax (37% bracket) and may re-qualify for the QBI deduction.
For successful solopreneurs (doctors, consultants), the Solo 401(k) limit ($69k) feels like a cap. The Defined Benefit (DB) Plan removes this cap, allowing you to build a private pension with astronomical tax savings.
Actuarial Calculation Logic
- Age: Older = Higher Limit (Less time to compound).
- Income: Higher 3-year average = Higher Benefit cap.
- Target: Max annual benefit allowed (~$275k/yr).
*Result: A 60-year-old can deduct $300,000+.
What-If Scenario: The Consultant ($600k Net)
| Strategy | Deduction | Tax Bill |
|---|---|---|
| Solo 401k Only | $76,500 | $210,000 |
| DB Plan + 401k | $222,000 | $130,000 |
Visualizing the Limit Gap
*Figure 1: Deduction Capacity by Age. The DB Plan (Red) scales exponentially with age compared to the flat 401(k) limit (Gray).*
Strategic Action Steps
1
Commit for 3-5 Years
The IRS requires these plans to be “permanent.” Plan to fund it for at least 3-5 years. Opening for one year is an audit flag.
The IRS requires these plans to be “permanent.” Plan to fund it for at least 3-5 years. Opening for one year is an audit flag.
2
Hire a TPA
Not a DIY project. You need a Third-Party Administrator and Actuary to file Form 5500 annually. Fees ($2k-$3k) are deductible.
Not a DIY project. You need a Third-Party Administrator and Actuary to file Form 5500 annually. Fees ($2k-$3k) are deductible.
3
Exit Strategy
When you retire, terminate the plan and roll the assets (e.g., $2M) into a Traditional IRA to continue tax-deferred growth.
When you retire, terminate the plan and roll the assets (e.g., $2M) into a Traditional IRA to continue tax-deferred growth.
The Bottom Line: Who Should Choose What?
- Choose DB Plan: Owners aged 50+ earning stable $400k+ net income who want to catch up fast.
- Choose Solo 401k: Owners under 40 or those with volatile income who need flexibility.
Frequently Asked Questions
How is this different from a Solo 401(k)?
Solo 401(k) is a defined contribution plan with a fixed cap. DB plans calculate contributions based on a future benefit goal, allowing much higher limits.
Is the contribution flexible?
No. Once established, funding is mandatory for a minimum period. It is a commitment. Risky for volatile income.
Can I combine it with a 401(k)?
Yes. You can layer a DB plan on top of a Solo 401(k). The 401(k) profit-sharing is capped at 6%, but employee deferrals remain available.
Disclaimer: This content is for informational purposes only. DB plans are complex. Consult an actuary.