A defined benefit plan is an ideal instrument for a self employed individual looking to put aside a large sum of money for retirement.
Unlike profit sharing and 401(k) the limits for annual contributions are much higher in the case of a defined benefit plan.
Below is a short checklist to find out if a defined benefit plan is a good option for you:
- Do you earn more than $100,000 each year?
- Is you business generating a lot of free cash flow?
- Do you see a relative stability in the cash flow for the next 2-3 years?
If you answered yes to the questions above, then a defined benefit plan might be a good option for you. Of course, you should consult with your tax advisor and financial planner before making a final decision, but we can provide a basic understanding of all the pro's and the con's.
Benefits of a defined benefit plan:
- Can provide large contributions and tax deductions to self employed individuals
- Extremely beneficial for business owners over 50 to adopt a defined benefit plan
Disadvantages of a defined benefit plan:
- Plans have to be designed and certified by an actuary each year in addition to a form being filed with the IRS
- The above requirement can lead to an annual administrative cost, so a cost benefit approach will be required
If you have read this far, you might be interested in finding out how much you can contribute to a defined benefit plan if you were to adopt one. Typically this requires complex actuarial calculations but our one of a kind defined benefit calculator will simplify the task for you.
You can estimate the contributions for the first year, generate a report and reach out to Pension Deductions to establish a defined benefit plan here.