Defined Benefit Plans have contribution limits that may be significantly higher than other retirement vehicles. The chart below compares the possible Defined Benefit contribution limit to other types of retirement plans.
How much you can contribute to a Defined Benefit Plan will depend on your age, income level and years in business, as discussed below. Curious how much you may contribute? Use the calculator to find out.
In a Defined Benefit Plan, a single sum as high as $3.2 million can be paid at age 62. The limit phases in over 10 years and reflects both contributions deposited and investment returns. Because contributions to the Defined Benefit Plan generally are made each year, the shorter the horizon to retirement, the higher the annual contribution can be without exceeding this limit. Conversely, a longer horizon results in a lower annual contribution limit.
In addition to the Defined Benefit limit being based on age, the contribution limit also is adjusted for income level. Specifically, if a business owner's compensation average is less than $245,000, the $3.2 million limit may be reduced proportionally for the lower compensation average.
In the first few years after Plan adoption, the business start date may impact the annual contribution maximum. For example, a reduction in the limit because of the business owner's compensation average may be fully or partially remedied depending on how long the business has existed. In future years, the compensation level will need to be increased to maximize potential deductions.
If the business owner's spouse also is an employee in the business, the deductible limit for the couple may potentially double. The spouse's Defined Benefit Plan contribution limit also will depend on his or her age, income level and years of service with the business.
To further increase the contribution limit, a Defined Benefit Plan can be paired with a 401(k) Profit Sharing Plan. This would allow the business owner and spouse, if applicable, to potentially defer $27,000 each in the 401(k) plus receive an employer contribution. Generally, the employer contribution would be limited to 6% of income, but the additional deductible amounts can further decrease taxes.