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 $67,500 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

Defined Benefit Plans may allow for much higher contributions than Defined Contribution Plans, such as 401(k) Plans. However, in a Defined Benefit Plan, contributions are not discretionary, and administration tends to cost more than Defined Contribution Plans. 

As someone who is self-employed, which type of retirement plan is best? In short, if you would like a tax-deductible contribution of at least $60,000 per year, a Defined Benefit Plan is likely a better fit. Otherwise, a Defined Contribution Plan, such as a 401(k) Plan, generally will be a better option.

If you want to make large deductible contributions as a business owner, a Defined Benefit Plan may be a better option than a Defined Contribution Plan, such as a 401(k) Plan. How much you can contribute will depend on your age and income level. Use the Defined Benefit Plan calculator to find out!

Defined Benefit Plan vs Defined Contribution Plan Summary