Defined Benefit Plan Examples

Defined Benefit Plans "turbo charge" your retirement.

With deductible limits well in excess of other retirement options, they allow business owners to rapidly accumulate wealth.

Although they aren't for everyone, Defined Benefit Plans are a powerful tool for the high-income business owner who wants to substantially reduce taxes while funding for retirement.

These case studies provide examples of when a Defined Benefit Plan may assist business owners. Note the variety of business industries, client ages and retirement objectives.

Turbo Charge Your Retirement

Background: Tom and Barbara are in their 60s and own a successful real estate company. This year, a strong economy has resulted in substantial profitability. In addition, with the day-to-day management of their business, saving for retirement has not been a priority in the past. They are exploring alternatives to quickly save for retirement while being tax-efficient. Moreover, they are uncertain whether strong growth in their industry will continue, so they want to "front-load" their contributions.

Solution: In this example, a Traditional Defined Benefit Plan paired with a 401(k) Profit Sharing Plan allows Tom and Barbara to make a tax-deductible contribution of over $1,000,000 in their first year. Upon retirement, Tom and Barbara will rollover their Defined Benefits to an IRA to continue tax deferral. Click here to see more detail.

Short Horizon, Massive Deduction

Young Owner, Large Tax Savings

Medical Group, Several Owners

Background: Jessica is a business owner in her late 30s who provides educational products to parents. She has two employees to assist her. Her business has experienced steady growth over the last several years, and she wants to manage her tax liability and make retirement contributions in excess of other retirement limits. In addition, she would like to provide meaningful benefits to her employees, while allocating the lion's share of benefits towards herself, as the owner.

Solution: A Traditional Defined Benefit Plan in combination with a 401(k) Profit Sharing Plan allows Jessica to contribute and deduct over $160,000 and allocate about 97% of contributions towards herself as the owner. When the plan is terminated, Jessica's benefit will be payable as a lump sum distribution and rolled over to an IRA. Click here to see more detail.

Background: An established medical practice is owned by several physicians, all with distinct retirement horizons. The physicians have significant incomes and need a way to shelter a portion of their earnings from high taxes, while funding towards the maximum Defined Benefit value of $3.5 million per owner. Because each physician has a different length of time to retirement, they need a way to customize the allocation to each owner. Additionally, the owners only want to provide a minimal benefit to their employees, while complying with applicable regulations.

Solution: In this defined benefit plan example, a Cash Balance Defined Benefit Plan along with a 401(k) Profit Sharing Plan most easily allows for targeted allocations to each owner. In addition, since the retirement benefit is expressed as an account balance, it is easier for owners to understand. Under this arrangement, a deductible contribution of over $670,000 is possible with about 94% of the contribution allocated to the physician owners. Click here to see more detail.

Four Partners, Only One Maximizing

Background: A partnership of four middle-aged owners provides consulting services to educational institutions. They have experienced strong growth but have not had to hire any employees. Of the four owners, only one partner wants to maximize his retirement contribution. A second partner wants to save a moderate amount, and the remaining owners are not interested in contributing towards retirement.

Solution: In this example, a Cash Balance Defined Benefit Plan is a good vehicle for allowing and tracking different contribution amounts to each owner. As mentioned previously, Cash Balance Plans are easier for business owners to understand. A combo 401(k) Profit Sharing Plan is added to further increase the maximum deductible contribution of the interested owner. In this situation, over $300,000 may be deductible, with about 95% of that amount attributable to the interested owner. Click here to see more detail.