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Introduction: The Return of the Pension Advantage
As retirement options evolve, defined benefit plans—the traditional pension model—are once again gaining attention among business owners and professionals seeking predictable retirement income and significant tax benefits.
At Z Tax & Accounting, we help our clients understand how defined benefit plans can be an efficient way to secure long-term income while reducing taxable income today. Whether you’re a sole proprietor, a high-earning professional, or a small business owner, a defined benefit plan may be a powerful addition to your retirement strategy.
What Is a Defined Benefit Plan?
A defined benefit (DB) plan is an employer-sponsored retirement plan that promises participants a specific, pre-determined benefit at retirement—usually based on salary history and years of service.
Unlike a defined contribution plan (such as a 401(k)), the employer bears the investment risk and is responsible for funding the plan adequately to meet future obligations.
In other words:
A defined benefit plan guarantees the outcome, while a defined contribution plan only defines the input.
How Defined Benefit Plans Work
A DB plan establishes a formula to calculate future benefits—commonly based on:
Average salary over a set period
Years of service
A fixed percentage multiplier
Example:
If a plan promises 1.5% of your average salary for each year of service, and you retire after 25 years earning an average of $100,000, your annual pension would be:
1.5% × 25 × $100,000 = $37,500 per year for life.
Employers fund the plan annually, guided by actuarial calculations to ensure sufficient reserves for all promised benefits.
Tax Advantages of Defined Benefit Plans
Defined benefit plans offer some of the most generous tax benefits available in retirement planning, particularly for high-income earners and business owners.
For Employers and Business Owners
Large Tax-Deductible Contributions: Depending on age and income, annual contributions can often exceed $100,000–$300,000, far higher than 401(k) limits.
Reduced Taxable Income: Contributions lower the company’s taxable income while building future retirement security.
Retirement Planning Efficiency: Ideal for owners nearing retirement who want to accelerate savings during high-earning years.
For Employees
Guaranteed Retirement Income: Offers long-term financial stability.
No Investment Burden: The employer assumes investment responsibility and market risk.
Predictable Payouts: Benefit amounts are clearly defined and not subject to market volatility.
At Z Tax & Accounting, we help design and structure defined benefit plans to maximize tax efficiency, ensure IRS compliance, and align with your long-term business goals.
Conclusion: Secure Your Future with Predictable Retirement Income
A defined benefit plan can be one of the most effective tools for high-income earners and business owners to reduce taxes and guarantee lifetime retirement income.
Whether you’re exploring new retirement plan options or ready to establish a custom strategy, the experts at Z Tax & Accounting are here to guide you every step of the way.
📞 Contact us today to learn how a defined benefit plan can work for your business and your future.
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