14 Reasons to Set Up a Self-Employed Defined Benefit Plan in 2025

This article has been updated for 2025.

Maximize Tax Savings and Build Retirement Wealth with Pension Plans for Self-Employed Professionals and Small Business Owners

If you are self-employed or a small business owner, a Self-Employed Defined Benefit plan is one of the most powerful retirement planning tools available. With the right strategy, this pension plan offers unparalleled benefits, allowing for large tax deductions while saving for your own future.

As stated, a Self-Employed Defined Benefit Plan can make a significant difference in your financial future. Here are 14 compelling reasons why you should consider setting up a Defined Benefit Pension Plan for your small business this year.

1. Self-Employed Defined Benefit Plans Allow Large Tax-Deductible Contributions

If you are self-employed or a small business owner, a Defined Benefit Pension Plan significantly reduces your taxes WHILE you save for your OWN retirement.

For small business owners and the self-employed, Defined Benefit Plans allow for far larger tax-deductible contributions than other retirement options. While IRA contributions are capped at $8,000 and SEP IRAs at $70,000 annually, a Self-Employed Defined Benefit Plan can allow you to contribute anywhere from $100,000 to over $250,000+ per year.

A key advantage of a Defined Benefit Plan is the ability for small business owners to adjust their contributions each year based on their financial situation, including cash flow and taxable income. As long as the contribution falls within the allowable contribution range, which can be quite flexible, it is permitted.

This flexibility is especially beneficial for business owners. The self-employed often use it strategically to maximize tax savings in years of higher income. For instance, during a particularly strong year, a business owner might choose to make larger contributions to reduce their taxable income. Additionally, many self-employed individuals opt to “front-load” their contributions, aligning the contributions with expected income and maximizing tax deductions. By varying contributions according to business performance, this approach can be an effective way to minimize taxes and optimize retirement savings over the long term.

2. Pension Assets Grow Tax-Deferred

A major benefit of a self-employed pension plan is the ability for your Defined Benefit assets to grow tax-deferred. Unlike other accounts where you may be taxed on yearly investment gains, Defined Benefit Plans let your money compound without the annual tax burden. Over time, this results in larger growth and a bigger nest egg for retirement.

Why does tax deferral matter? Taxes take a bite out of your retirement savings, leaving you with less to invest and ultimately less at retirement. With tax deferral, every dollar stays in your plan, creating a larger asset base, greater compounding, and meaningfully higher savings over time. The long-term impact can be dramatic.

When a small business owner combines tax deferral with the high contribution limits of a Defined Benefit Plan, substantial retirement assets can be amassed in just a few years.

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3. Roll Over Defined Benefit Plan Assets at Retirement

When you retire or if you terminate your plan, you can roll over your defined benefit assets into an IRA, continuing the tax-deferred growth. This option gives you more control over how your retirement funds are managed, allowing for further tax deferral until you start taking distributions.

With continued tax deferral in retirement, your savings work harder for longer. Continued tax deferral can extend the life of retirement funds—or support a higher retirement income for the business owner.

4. Pair with a 401(k) Plan for Even More Tax Savings

A Self-Employed Defined Benefit Plan isn’t the only retirement option available to you. You can also set up a 401(k) Profit Sharing Plan alongside your pension plan to increase your contributions even further. This combination can add up to an additional $52,000 in tax-deductible contributions annually.
 

5. Your Spouse Can Boost Your Pension Tax Deductions

If your spouse is also involved in the business, they can also participate in the Self-Employed Defined Benefit Plan, increasing the potential tax deductions significantly. In some cases, with both you and your spouse contributing, the combined Defined Benefit and 401(k) Plan contributions could reach up to $900,000 in certain years—especially if you “front-load” your contributions.

6. No 25% Compensation Limit on Defined Benefit Plans

Unlike SEP or 401(k) plans, which limit employer contributions to 25% of compensation, Self-Employed Defined Benefit Plans do not have this restriction. This makes it possible for business owners to contribute a significantly larger portion of their income to their pension plan, offering greater flexibility and maximizing your retirement savings.

It is not uncommon for Defined Benefit Plan contributions to exceed 25% of compensation—something which is not generally possible with other retirement plans. This is especially valuable for business owners who want to save a large share of their income, such as when living expenses are covered by other sources (a taxable account, spousal income, or when the business is a “side gig“). In these situations, a Defined Benefit Plan allows owners to contribute—and shelter—a much higher proportion of income.

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7. Lower Payroll Taxes for Self-Employed Pension Plans

A unique advantage of Self-Employed Defined Benefit Plans is their ability to reduce payroll taxes. Since contributions are not subject to the 25% of compensation rule, business owners can often lower their salary to meet the plan’s contribution requirements, thus reducing payroll taxes while still benefiting from large tax deductions.

Thus, Defined Benefit Plans not only deliver far greater income tax savings than other retirement vehicles—they can also reduce payroll taxes.

8. Shorter Horizon? Make Up for Lost Time with Large Contributions

For those near retirement age, Defined Benefit Plans offer the ability to make large contributions quickly—allowing you to “catch up” on retirement savings. If you are 50 or older, you can still accumulate significant retirement assets, with the potential to fund a $3.6 million balance in only 10 years with strategic contributions.

Building a large retirement balance in a short timeframe is not possible with most plans. For example, 401(k) Plans limit “catch-up” contributions to just $7,500 per year.

Defined Benefit Plans are different. They allow business owners to make sizable, tax-deductible contributions and quickly catch up on retirement savings. At age 50, it’s possible to contribute about $285,000 annually for 10 years—enough to reach a balance of $3.6 million by age 62 (assuming a 5% return). If a spouse is also an employee, contributions may be doubled. 

9. Longer Horizon? Contribute More for Compounded Growth

Defined Benefit Plans are not just for those nearing retirement—young business owners can benefit as well. Even in their 30s, owners may be able to make tax-deductible contributions exceeding $120,000 per year. These limits are increased further if the spouse is also a participant and/or when paired with a 401(k).

Starting early means more time for investment growth, lowering the long-term cost of funding retirement and building wealth more efficiently.

10. Cash Balance Plans “Look and Feel” Like 401(k) Plans

Cash Balance Plans offer a streamlined alternative to traditional Defined Benefit Plans, making them easier to understand and manage, which is especially important for businesses with other non-spouse owners or employees. Unlike traditional pensions, which promise a monthly annuity, Cash Balance Plans show benefits as an account balance—providing a clear picture of value at any point in time.

This transparency is especially valuable when a business has non-spouse co-owners. It makes it easier to allocate benefits among owners, track each owner’s contributions relative to plan benefits, and divide benefits fairly when an owner retires.

Here’s how a Cash Balance Plan works: each year, the plan credits your account with a set amount or a set percentage of pay (the “pay credit”), plus a guaranteed interest credit. Over time, these balances grow steadily, and at retirement, the account is paid out as a lump sum, typically rolled into an IRA for continued tax deferral.

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11. Defined Benefits Promote Engagement and Retention

Consider this: would you rather send $1,000 to the IRS or provide $1,000 in retirement benefits to your employees?

That is essentially the choice when adopting a Defined Benefit Plan. Without a plan, the business owner pays higher income taxes. With a plan, some of those dollars are redirected into employee benefits.

For most owners, the decision is clear. Paying more in taxes provides no return, while funding employee benefits can improve appreciation, engagement, and retention—all of which support business growth.

Even better, in many cases, the tax savings from a Defined Benefit Plan far exceed the cost of required employee benefits, making the decision especially compelling.

12. Small Business Owner Gets Most of the Defined Benefit Assets

While employee benefits are required, in the right circumstances 80% to 95% (or more) of employer contributions can be allocated to the owner. In these cases, the tax savings typically outweigh the cost of employee benefits, resulting in a net financial gain for the business owner.

The exact allocation between owner and employees depends on factors such as the owner’s age and income, whether a spouse is employed, the number of employees, and staff demographics.

If you’re interested in making a large deductible contribution but have employees, we can prepare an illustration showing both the potential tax savings and the cost of employee benefits—helping you determine whether a Defined Benefit Plan is the right fit for your business.

13. Loan Option is Available in Self-Employed Defined Benefit Plans

For self-employed individuals, having access to funds when you need them is crucial. A Self-Employed Defined Benefit Plan can offer a loan option, much like a 401(k), providing a safety net when financial pressures arise. Although there are drawbacks to borrowing from your retirement plan, this option provides flexibility during times of need.

14. Creditor Protection for Defined Benefit Plan Assets

In the event of a bankruptcy or financial difficulties, Defined Benefit Plans may offer creditor protection, meaning that the funds in your pension plan may be safe from being seized by creditors. This protection is a significant advantage for business owners looking to safeguard their hard-earned retirement savings.

Should I Set Up a Defined Benefit Pension Plan?

Whether a Defined Benefit Plan is right for you depends on several factors. But if you’re self-employed, at least 35 years old, and want to save $80,000+ per year for the next 3–5 years, a Defined Benefit Plan is worth serious consideration.

Want to see your potential tax deduction? Try our Defined Benefit Plan calculator.

For a detailed analysis tailored to your situation, contact us—we’ll provide the information you need to make an informed decision.

When Must I Adopt the Defined Benefit Plan?

To receive the tax deduction for 2025, a Self-Employed Defined Benefit Plan must be established before the due date (with extension) of your business return (or by 9/15/2026, if sooner).

If you are interested in adopting a Defined Benefit Plan or getting more information, contact us for a free consultation.

We look forward to helping you significantly reduce your taxes WHILE you save for your own retirement.