Defined Benefit Plan for Self-Employed: Contributions and Setup

A defined benefit plan for the self-employed is a qualified retirement plan that promises you a specific benefit at retirement and requires an actuary to calculate how much you must contribute each year to fund it. In 2026, the plan can promise a maximum annual benefit of $290,000, and funding that promise routinely produces six-figure, fully deductible contributions.¹ The trade-off is real: once you adopt the plan, the contribution is mandatory every year, and you pay an actuary and administrator to keep it compliant.

Who the Plan Actually Fits

A defined benefit plan is designed for a narrow profile: a self-employed professional with high, stable income who wants to shelter far more than a SEP IRA or Solo 401(k) allows, and who has enough years to retirement that the tax savings justify the setup and administration.

Age matters more than most people expect. Older participants require larger contributions because the actuary has fewer years to project investment growth toward the target benefit, which is why a 55-year-old surgeon earning $500,000 and planning to retire at 62 can shelter two to three times what a Solo 401(k) allows. A 40-year-old consultant earning $250,000 usually does not need one; a Solo 401(k) already covers the need without a mandatory funding obligation.

Income stability is the other filter. The plan owes its minimum required contribution every year regardless of how the business performed. If revenue can swing hard from one year to the next, a defined benefit plan is the wrong tool.

How the Contribution Is Set

You do not choose the contribution. You choose a target benefit, and an enrolled actuary calculates the annual contribution needed to fund it. The IRS caps the promised benefit at $290,000 per year in 2026, payable as a lifetime annuity starting no earlier than age 62.¹² If you want payments to start before 62, the ceiling is actuarially reduced for the longer expected payout. The IRS safe harbor allows a normal retirement age as early as 62; plans often use 65.³

The actuary converts the target benefit into a present-value lump sum needed at retirement, measures current plan assets, and calculates the annual contribution required to close the gap given the years remaining and the assumed investment return.⁴ Three variables move that number the most:

Your age. Fewer years to retirement means less time for investment growth, so the contribution must be larger.
The assumed rate of return. A 5% assumption produces a much higher required contribution than a 7% assumption because less of the target is expected to come from earnings.
Actual investment performance. A year that underperforms the assumption raises next year’s required contribution; a year that beats it lowers next year’s contribution.

For a sole proprietor, plan compensation equals net self-employment earnings minus the deductible half of self-employment tax, further reduced by the plan contribution itself.⁵ The compensation used in the benefit formula is capped at $360,000 for 2026.¹

What You Can Deduct

The deductible amount for a single-employer defined benefit plan is generally the greater of the minimum required contribution or a higher ceiling tied to the plan’s total funding target.⁶ For most solo practitioners, the required contribution and the deductible amount end up close to the same number. The actuary’s certification is the legal basis for the deduction.

A 55-year-old sole proprietor targeting the maximum benefit with a retirement date at 62 can face required contributions well above $200,000. There is no fixed dollar cap the way a SEP IRA or Solo 401(k) has one. The number is whatever the actuary determines is needed.

Adding a Solo 401(k) on Top

You can run both plans at once, and most high earners do. In 2026, the Solo 401(k) side can add up to $24,500 in employee elective deferrals, or $32,500 if you’re 50 to 59 or 64 and older, or $35,750 if you’re 60 to 63.¹ Elective deferrals generally do not count against the combined deduction limit under IRC Section 404(a)(7), which is the greater of 25% of compensation or the DB plan’s minimum required contribution.⁷ If employer profit-sharing contributions to the 401(k) exceed 6% of compensation, that combined limit becomes tighter, so most combination plans keep the 401(k) side to elective deferrals only.

Setting the Plan Up

The SECURE Act of 2019 extended the adoption deadline. You can establish a new defined benefit plan as late as the due date of your tax return, including extensions, and still take the deduction for that year. For a calendar-year sole proprietor who extended, a plan adopted by October 15, 2026 can produce a deduction on the 2025 return.

Four things have to happen to get the plan running:

Engage an enrolled actuary. The actuary designs the benefit formula based on your income, age, and retirement target, and everything else flows from that design.
Adopt a plan document. Most solo practitioners use a pre-approved prototype plan that already carries IRS approval and specifies the benefit formula, eligibility, distribution provisions, and amendment rules.⁸
Establish a trust to hold plan assets separately from your personal and business accounts. You can serve as your own trustee.
Retain a third-party administrator. The TPA coordinates with the actuary, handles annual paperwork, and prepares IRS filings.

Setup fees typically run $1,500 to $2,000, paid to the TPA or document provider. That is a one-time cost, separate from annual administration.

What You Owe Every Year After That

The annual burden is where these plans earn their reputation. Every year the plan exists, you have four things to deal with.

The Actuarial Valuation

The enrolled actuary performs a valuation each year, measures plan assets against liabilities, and calculates the minimum required contribution for the upcoming year. The actuary prepares Schedule SB.⁹ If you file the simplified Form 5500-EZ, you do not submit Schedule SB with the filing, but the actuary must still complete it and you must retain it.¹⁰

The Funding Deadline and Its Penalties

The minimum required contribution for a calendar-year plan must be funded by September 15 of the following year. That deadline is independent of your tax return due date. Miss it and the IRS imposes an excise tax of 10% of the unpaid amount. If the shortfall is still uncorrected at the end of the taxable period, the penalty rises to 100% of the unpaid amount.¹¹ Those excise taxes sit on top of the contribution itself and are not deductible. This is the biggest single risk of the plan: a bad year in your business does not excuse the funding obligation.

IRS Filings

Solo practitioners whose plans cover only themselves (and a spouse, if applicable) file Form 5500-EZ instead of the full Form 5500. Filing becomes mandatory once total plan assets exceed $250,000. Below that, filing is required only in the plan’s final year.¹⁰ The deadline is the last day of the seventh month after the plan year ends, or July 31 for a calendar-year plan.

Administration Fees

Annual TPA and actuarial fees for a solo defined benefit plan generally run $2,000 to $5,000, depending on plan complexity and provider. They are deductible business expenses, but they represent a real recurring cost that a SEP IRA does not have and a Solo 401(k) barely does.

The Cash Balance Variant

A cash balance plan is technically a defined benefit plan, but the benefit is expressed as a hypothetical account balance rather than a monthly annuity. Each year the plan credits a “pay credit” (a percentage of compensation or flat dollar amount) and an “interest credit” (a fixed rate or one tied to an index like U.S. Treasuries).

The appeal for a solo practitioner is stability. In a traditional defined benefit plan, required contributions swing meaningfully with actual investment performance. In a cash balance plan with a fixed interest credit rate, the guaranteed rate on the hypothetical balance is known up front, which produces a steadier funding obligation. Returns above the interest credit rate reduce future contributions; returns below raise them, usually by less than in a traditional design.

Every other rule is the same. You still need an actuary, still must fund the minimum required contribution, still face the same excise taxes for underfunding, and the $290,000 benefit ceiling still applies.¹ Most solo practitioners adopting a “defined benefit plan” today are actually adopting a cash balance design.

Getting the Money Out

You can generally begin receiving benefits at the plan’s normal retirement age, typically 62 or 65. Distributions before age 59½ are subject to a 10% early withdrawal penalty on top of ordinary income tax unless an exception applies.¹² Required minimum distributions must begin by April 1 of the year after you turn 73.¹³

Most self-employed plan owners don’t want the monthly annuity. They want to roll a lump sum into a traditional IRA and control the money themselves. If the plan permits lump-sum distributions, a direct trustee-to-trustee rollover moves the full balance into an IRA with no tax withheld and no immediate taxation.¹⁴

Closing the Plan

A defined benefit plan is not meant to run forever. Most self-employed individuals adopt one for a specific horizon, often 5 to 10 years, and terminate once the target benefit is funded. You set a termination date, which freezes accruals and fully vests all accrued benefits regardless of any vesting schedule in the plan document. Minimum funding applies through the plan year that includes the termination date but not beyond.¹⁶

After termination, all plan assets must be distributed as soon as administratively feasible, which the IRS reads as within one year. If you miss that window, the IRS treats the plan as still active and Form 5500 filings continue. The typical exit is a lump-sum rollover to an IRA, which defers all tax until withdrawals begin.

How It Compares to a SEP IRA or Solo 401(k)

The right plan depends on income, age, income stability, and tolerance for administration.

SEP IRA. Contributions are capped at the lesser of 25% of net self-employment earnings or $72,000 in 2026 and are entirely discretionary. No actuary, no filing until assets exceed $250,000, almost no administrative cost. Simplest option, but the lowest ceiling for high earners.¹⁷
Solo 401(k). Employee deferrals up to $24,500 in 2026, plus catch-up amounts of $32,500 at 50 to 59 or 64 and older, or $35,750 at 60 to 63, plus employer profit-sharing up to 25% of compensation, with total additions capped at $72,000 before catch-up. Profit-sharing is discretionary. Roth option available; participant loans allowed. Administration stays minimal below $250,000 in assets.¹
Defined benefit plan. No fixed contribution cap. Annual contribution is whatever the actuary calculates, often well above $100,000 for older participants. Contributions are mandatory every year. Annual actuarial and administration fees of $2,000 to $5,000. Enrolled actuary required each year.

For a 40-year-old consultant at $250,000, a Solo 401(k) usually does the job with none of the funding risk. For a 55-year-old professional at $500,000 planning to retire at 62, a defined benefit plan, often paired with a Solo 401(k) for the elective deferral, can shelter multiples of what the 401(k) alone would allow. Where you sit on the age-income-stability spectrum decides which one is right.

1
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs, as Adjusted for Changes in Cost-of-Living
2
Office of the Law Revision Counsel. 26 U.S. Code 415 – Limitations on Benefits and Contribution Under Qualified Plans
3
Internal Revenue Service. Retirement Topics – Significant Ages for Retirement Plan Participants
4
eCFR. 26 CFR 1.430(a)-1 – Determination of Minimum Required Contribution
5
Internal Revenue Service. Calculation of Plan Compensation for Sole Proprietorships
6
Office of the Law Revision Counsel. 26 U.S. Code 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan
7
Internal Revenue Service. Combined Limits Under IRC Section 404(a)(7)
8
Internal Revenue Service. Pre-Approved Retirement Plans – Adopting Employer
9
U.S. Department of Labor. Schedule SB Form 5500 – Single-Employer Defined Benefit Plan Actuarial Information
10
Internal Revenue Service. Instructions for Form 5500-EZ
11
Office of the Law Revision Counsel. 26 U.S. Code 4971 – Taxes on Failure to Meet Minimum Funding Standards
12
Internal Revenue Service. Tax Topic 558 – Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
13
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
14
Internal Revenue Service. Retirement Topics – Qualified Joint and Survivor Annuity
16
Internal Revenue Service. Employee Plans Webinar – Defined Benefit Plan Terminations
17
Internal Revenue Service. SEP Contribution Limits (Including Grandfathered SARSEPs)