Defined Benefit Plan vs Defined Contribution Plan

Defined Benefit vs Defined Contribution Plans

How They Stack Up

Retirement benefit depends on level of contributions and investment returns.

Retirement benefit predefined. Contributions calculated each year to reach target.

Annual contribution is limited to $62,000 per person.

Annual contribution as high as $250,000+ each.

Contributions are discretionary.

Contribution generally required each year.

Employer contributions are limited to 25% of pay.

Employer contributions NOT limited to 25% of pay.

Assets may be in individual accounts or pooled.

Assets must be pooled.

Administration cost is generally lower, but a lower deduction is permitted.

Administration cost is generally higher, but a higher deduction may be allowed.

Defined Contribution Plan

Defined Benefit Plan

At a high level, Defined Benefit Plans allow for much higher contributions than Defined Contribution Plans. However, in a Defined Benefit Plan, contributions are not discretionary and administrative expenses tend to be higher than Defined Contribution Plans. 

As someone who is self employed, which type of retirement plan is right for you? In short, if you would like to make a tax deductible contribution of at least $60,000 per year, a Defined Benefit Plan is likely a better fit. Otherwise, with some exceptions, a Defined Contribution Plan will be a better option.

If you want to make large deductible contributions as a business owner, a Defined Benefit Plan is a great option. How much you can contribute will depend on your age and income level. Use the Defined Benefit Plan calculator to find out!

DB vs. DC Summary