By Craig Childress, CFP®

One of the most frequent issues small companies deal with is funding the personal retirement plan of the business owner. Some company owners can make use of special opportunities provided by defined benefit plans (DBPs) to significantly increase the rate at which they finance their retirement. A DBP won’t always be effective since different testing criteria limit the number of employers. Although there is no set size restriction, the numbers often don’t work as well for large businesses. However, the tax advantages are substantial for business owners whose organizations meet the requirements. Follow along to learn more about whether a defined benefit plan could work for you and your company.

Who Can Use a DBP?

A DBP is ideal for small businesses that are established and growing, with older owners and younger employees. As gross revenues increase over the years, tax problems grow more complex. Owners whose personal income is taxed in the higher brackets should consider the possibility of adding a DBP. Age is an important factor. If the owner is under age 40 or has a large number of employees, this plan may not be a good fit (especially if some of those employees are older than the owner).

The Difference a DBP Makes

The main benefit of a DBP is that it allows a business owner to put away a lot more money, tax-deferred, than what would otherwise be allowed through other retirement plans like a 401(k) or IRA. With a DBP, we have seen some business owners able to save $100,000, $200,000, or $300,000 per year, depending on their age and salary. The closer you are to age 65 and the more you show as salary, the more you can put away with a DBP.

Examples of a DBP

Let’s look at a couple fictional examples to see how the numbers work. Say a small company with two owners contributed very little to their retirement when the first started the company and they were young. Now that they are both approaching 50, they want to catch up on their retirement savings in a hurry. By adding a DBP to the mix, they could increase their contributions to well over $100,000 per year, and receive a tax deferral on the full amount. 

And how about a small company owned by a husband-and-wife team with three employees. By giving employees a small benefit amount on the DBP, the owners would be eligible to receive a lot more. Located in Oregon and paying federal tax at the top tax rate of 37%, they are able to realize a total of 44.06% tax savings when you factor in the 37% federal tax and 7.06% Oregon state tax, which translates to huge tax savings over time! These results are fairly typical for the right businesses.

Selling Your Busines

When selling their business, owners are often shocked by the capital gains tax liability.  A DBP can be used to defer these taxes into the future.  Even though capital gains tax is less than ordinary income tax, a partial deferral of the sales proceeds can significantly benefit the owner. 

We’re Here to Help

A DBP is not the only option for business owners looking to fund their retirement. This is an example of one way business owners sometimes miss out on opportunities due to not taking advantage of the right strategies early enough. If you own a business and would like to explore the possibility of a DBP or investigate other options that might work, schedule an introductory phone call or reach out to us at 503-342-2249 or

About Craig 

Craig Childress is Wealth Manager and a CERTIFIED FINANCIAL PLANNER™ professional at Oswego Wealth Advisors, an independent firm in Lake Oswego, Oregon, dedicated to helping their clients remove financial uncertainty so they can focus on what matters most. With over 35 years of experience, Craig employs a personal approach to help people find solutions to their financial needs and concerns, set goals, clarify their values, and design a plan that aligns their money with their values. He does everything with purpose and intention, and cares deeply about his clients and their families, desiring to equip and empower them to work toward financial freedom and a fulfilling life. As a Fiduciary, Craig puts his clients first, always, and provides transparent guidance that makes a significant difference in their lives. When he is not serving his clients, you can find Craig involved at River West Church, serving the community here and abroad through the Lake Oswego Rotary Club, reading, gardening, or playing his guitar. He loves spending time with his family, especially his wife, Terri, and their grown children. To learn more about Craig, connect with him on LinkedIn.