Defined Benefit plans can prove to be the best pension plan if you are a self-employed individual or small business owner with a lot of free cash flow and over the age of 50. It can also significantly reduce your income tax liability each year and increase your retirement savings manifold. Small business owners are also required to provide some benefits to the employees in a defined contribution plan and it could be a great retaining factor for some of the best employees that you would want to retain.
Major Benefits of a Defined Benefit Pension Plan
- Significant benefits (read money) can be provided and earned over a short period of time, even with early retirement.
- Employers can contribute (and deduct) more than other pensions such as defined contributions.
- The plan offers a predictable and guaranteed benefit, and the benefits are not dependent on asset performance.
- This plan can be used to promote certain business strategies through supported early retirement benefits.
- DB benefits favour older members because they are closer to retirement and need to earn benefits faster than younger members.
Let’s explore some of these benefits in detail:
Contribution Amounts: You can contribute $19,000 to a 401(k) and $56,000 to a profit sharing plan for 2019. If you are above 50, you can contribute an additional $6,000 as catch up contributions which makes your maximum 401(k) limit equal to $25,000 an the profit-sharing limit will be $62,000.
However, the contribution amount to a defined benefit plan is significantly higher and is calculated by an actuary each year. This amount is based on your age, compensation history and years of service. You can use our online defined benefit plan calculator to estimate your contribution amount.
Tax Deductions: Contributions to a defined benefit plan are considered a business expense and you can avail a deduction on it. This typically means lowering your taxable income significantly each year.
For more information, please see our Full Guide to Defined Benefit Plan.
