A Defined Benefit Pension Plan is a type of retirement plan. If you are self employed, implementing a Plan allows you to significantly reduce your taxes WHILE you fund your OWN retirement. While other retirement vehicles also may allow tax-advantage retirement funding, Defined Benefit Plans have much higher deductible limits. Here are ways you can benefit from a self employed Defined Benefit Plan:
1. Massive deductible contributions: Self employed Defined Benefit Plans allow for deductible contributions of $100,000 to $250,000+ per year!
2. Tax-deferred growth: Once contributed to a Defined Benefit Pension Plan, asset growth is not taxed while in the Plan.
3. Continued deferral after retirement: Upon retirement, Defined Benefit assets can be rolled over to an IRA for continued tax-deferral.
4. Add a 401(k) plan to increase the deduction: Defined Benefit Plans can be used in combination with a 401(k) Plan to provide additional tax deductions.
5. Potentially double the deduction if your spouse is an employee: If the business owner's spouse also works for the business, the deduction could potentially double to $200,000 to $500,000+ per year!
6. May reduce payroll taxes: Defined Benefit Plans provide larger benefits for a given level of wages than SEPs or 401(k) Plans. Since payroll taxes are a function of wages paid, a lower salary results in lower payroll taxes.
In summary, a Defined Benefit Plan helps the self employed reduce income taxes, payroll taxes and quickly fund a retirement asset. For the high-income business owner, there may not be a better vehicle!
Self employed Defined Benefit Pension Plans provide an annuity benefit that is typically a percentage of compensation (e.g., 10% of pay times years of service). As participants in the Plan work longer and their pay increases, their Defined Benefit grows. Upon termination, the final benefit is calculated and the participant is offered a lifetime annuity payable at the Plan's retirement age (e.g., age 62 or 65) or a single sum payout that is actuarially equivalent to the monthly payment stream. In almost all cases, the single sum payout is chosen.
In a Defined Benefit Plan, there are no individual accounts. Rather, assets to pay the individual benefits are pooled. Each year, an actuary determines a contribution range to ensure that benefits are funded according to IRS guidelines. When the self employed Defined Benefit Plan is eventually terminated, a final contribution may be needed to payout everyone's benefits.
To learn more about how a Defined Benefit Plan can help you, see these resources:
• How much can I contribute? Defined Benefit calculator and Defined Benefit Contribution limits
• Setting up a Defined Benefit Plan: How to set up a self employed Defined Benefit Plan
• Case Studies: Defined Benefit Pension examples
• Illustrator video and FAQs: Defined Benefit video and FAQs
• Defined Benefit Plans vs Cash Balance Plans: Defined Benefit Plans vs Cash Balance Plans
• Defined Benefit Plans vs SEPs or 401(k) Plans: Defined Benefit Plans vs Defined Contribution Plans
• Defined Benefit Plan rules: Defined Benefit Plan rules