Defined benefit retirement plans allow high income, self-employed professionals, and owners of small businesses to make the largest IRS approved tax-deductible contributions each year, often $150,000 or more.  These plans can also be combined with the more traditional retirement plans such as a 401(k) or profit-sharing plan to increase your tax deferred retirement savings even more.

Generally, if you are 45 or older, a high earner and can save big for at least three to five years, consider having one of these plans designed just for you. This is technically the same sort of fixed monthly pension big companies used to provide for their workers, but it serves a different purpose when custom designed. If designed properly, this can result in up to a decade or more of huge tax deductions.  These types of plans are specifically designed for individuals with high incomes who have the ability to save annually with figures far greater than a traditional 401(k) plan.

Defined benefit plans are qualified employer-sponsored retirement plans. Like other qualified plans, they offer tax incentives both to employers and to participating employees. For example, the employer can generally deduct all contributions made to the plan as well as all associated fees, potentially allowing an employer to have substantial tax benefits.  And as the participant, you generally won’t owe tax on those contributions until you begin receiving distributions from the plan.

Defined benefit plan contributions are mostly derived from a combination of your age and income and are calculated annually by an actuary.  The plan is termed ‘defined’ because the formula for calculating the employer’s contribution is known ahead of time. The younger you are the less you can contribute, as the money has more time to grow.  The plan is designed to guarantee participants a certain benefit at retirement.

One primary consideration when establishing a defined benefit plan is understanding you must fund a minimum level each year.  If you fail to fund your plan at the minimum level annually, your plan will be in violation of the IRC.  Additionally, since the employer is responsible for making investment decisions and managing investments for the plan, the employer assumes all the investment risk.

When establishing a retirement plan, it is critical to work closely with your financial advisor as well as your CPA to select the right option for you, to help maximize the benefits of the plan for your specific financial wants and needs.


Kristie L. Guadiano
Partner
Greystone Financial Group, LLC

Disclosures:
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their wealth advisor prior to making any investment decision.