Supercharge Your Retirement: The Power of Combining Defined Contribution and Defined Benefit Plans

09/08/2025

Looking for additional ways to maximize your tax efficiency and retirement savings? If your current 401(k) or other defined contribution plan feels like it's leaving money on the table, you're not alone. Many savvy individuals find themselves hitting contribution limits long before they reach their desired retirement nest egg. But what if there was a way to significantly augment your savings, enjoy substantial tax deductions, and secure a more predictable retirement income?

Enter the "combo plan"—a powerful synergy of a defined contribution plan (like your familiar 401(k) or profit-sharing plan) and a defined benefit plan (often referred to as a pension). While once considered relics of a bygone era for large corporations, defined benefit plans are making a strong comeback, especially for business owners and highly compensated professionals. When strategically combined with a defined contribution plan, they can unlock a level of retirement savings and tax advantages that most individuals only dream of.

Is a Combo Plan Right for You?

A combined defined contribution and defined benefit plan is particularly well-suited for:

• Successful small business owners with consistent, strong profits looking to significantly reduce their taxable income.
• High-income individuals who have maxed out their other retirement savings options and want to accelerate their wealth accumulation.
• Individuals nearing retirement who need to make substantial contributions in a shorter timeframe to catch up on retirement savings.
• Businesses seeking to offer a highly attractive and robust retirement benefits package to key employees.

The Foundations: Defined Contribution vs. Defined Benefit

Before we dive into the powerful combination, let's review the two distinct types of retirement plans:

• Defined Contribution Plans (e.g., 401(k), Profit-Sharing, SEP IRA): These plans are like personal savings accounts for retirement. You (and often your employer) contribute a defined amount, and the ultimate retirement benefit depends on the investment performance of your account. The investment risk largely falls on you, the participant. The key here is that the contribution is defined, not the benefit. For 2025, the employee elective deferral limit for a 401(k) is $23,500, with an additional $7,500 catch-up contribution for those aged 50 and over (and a higher catch-up of $11,250 for those aged 60-63). The total combined employee and employer contribution limit for defined contribution plans is $70,000 for 2025.
• Defined Benefit Plans (e.g., Traditional Pension): Imagine a guaranteed paycheck in retirement. That's the essence of a defined benefit plan. The employer promises a specific, predetermined monthly income at retirement, often based on a formula involving your salary and years of service. The employer bears the investment risk and is responsible for funding the plan to ensure those future payments. The benefit is defined, not the contribution. For 2025, the maximum annual benefit under a defined benefit plan is $280,000.

Why Combine? The Synergy of the Combo Plan

Individually, both types of plans offer significant tax advantages. Contributions are generally tax-deductible for the employer, and earnings grow tax-deferred until withdrawal in retirement. However, the real magic happens when you bring them together.

1. Supercharged Contribution Limits: This is often the primary driver for high-income individuals and business owners. While your 401(k) has annual contribution caps, a defined benefit plan allows for significantly larger deductible contributions, especially for older, highly compensated individuals who have fewer years until retirement. The contributions to a defined benefit plan are actuarially determined to ensure the promised future benefit can be paid. This means you can funnel a substantial amount of pre-tax income into your retirement savings, dramatically reducing your current taxable income.
2. Accelerated Retirement Savings: For those nearing retirement or simply wanting to build wealth more quickly, a defined benefit plan offers a powerful accelerant. Because the benefit is fixed, the contributions needed to reach that benefit can be very high, particularly when you have a shorter time horizon. This can allow you to accumulate a much larger retirement fund in a shorter period than with a defined contribution plan alone.
3. Predictable Retirement Income: While your 401(k) balance will fluctuate with market performance, a defined benefit plan provides the security of a guaranteed income stream in retirement. This predictability can be a huge comfort, offering a stable financial foundation regardless of economic ups and downs. Think of it as balancing the market-based growth potential of your 401(k) with the steady income stream of a pension.
4. Significant Tax Deductions: The contributions made to both defined contribution and defined benefit plans are generally tax-deductible for the business. This can lead to substantial reductions in your business's taxable income, and by extension, your personal tax liability as a business owner. This isn't just about saving for retirement; it's a powerful tax planning strategy.
5. Employee Benefits and Retention (for Businesses): While the primary driver for business owners might be their own retirement, offering a robust retirement package with both defined contribution and defined benefit elements can be a powerful tool for attracting and retaining top talent. It demonstrates a strong commitment to your employees' financial well-being and can differentiate your business in a competitive job market.

The "How-To": Making it Work for You

Combining these plans isn't a DIY project. It requires careful planning, actuarial calculations, and adherence to complex IRS regulations. Here's a general overview of the process:

• Consult with Professionals: The first and most crucial step is to work with experienced professionals: a qualified tax advisor, a pension actuary, and a third-party administrator (TPA). Your tax advisor will help assess your financial situation and tax goals, while the actuary will design the defined benefit plan and calculate the necessary contributions. The TPA will handle the ongoing administration and compliance.
• Plan Design and Illustration: Your team of professionals will help you design a plan that meets your objectives, considering factors like your age, income, and desired retirement benefit. They will provide illustrations showing the potential contributions and tax savings. The goal is often to maximize owner contributions while still providing a meaningful, non-discriminatory benefit to eligible employees.
• Understanding the Rules: When combining plans, certain IRS rules come into play, such as the "6% rule" and the "31% rule." The 6% rule generally limits the profit-sharing contribution to your 401(k) to 6% of compensation when combined with a defined benefit plan, compared to the typical 25% limit. The 31% rule allows the combined contributions to both plans to not exceed 31% of your compensation, offering flexibility in certain situations. These rules are designed to prevent excessive tax deferral and ensure fairness across participants.
• Ongoing Administration and Compliance: Defined benefit plans, in particular, have rigorous annual funding, reporting, and actuarial requirements. This is where your TPA becomes invaluable, ensuring your plan remains compliant with ERISA and IRS regulations.

While the administrative costs and complexity are higher than a standalone 401(k), the potential for massive tax deductions and accelerated retirement savings often far outweighs these considerations for the right candidates.

Don't let the complexity deter you from exploring this powerful strategy. Just as a well-tuned engine requires expert mechanics, optimizing your retirement plan requires specialized knowledge. By engaging with experienced tax professionals, you can navigate the intricacies and unlock a more secure and prosperous financial future.

Sign up today for a FREE discovery call.

Sources:

• Internal Revenue Code (IRC) Section 401(k): Outlines rules for qualified cash or deferred arrangements.
• Internal Revenue Code (IRC) Section 415(b): Limits the annual benefits for a defined benefit plan ($280,000 for 2025).
• Internal Revenue Code (IRC) Section 415(c): Limits the annual contributions and other additions to a defined contribution plan ($70,000 for 2025).
• IRS Notice 2024-80: Provides the cost-of-living adjustments for 2025, including the elective deferral limit of $23,500 and the catch-up contribution limits of $7,500 and $11,250 for certain ages, as well as the annual limits for defined benefit and defined contribution plans.
• IRS Publication 560: "Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)" provides an overview of various plan types and their rules.
• Treasury Regulation §1.415(a)-1: Provides the general rules for limitations on benefits and contributions under qualified plans.

Greg Tobias, Enrolled Agent

Admitted to practice before the Internal Revenue Service