If you or your clients are sole proprietors or small business owners with 30 or less employees, you may be missing out on a great opportunity to help them achieve two important goals – reducing their current tax burden and increasing their future retirement savings.
Most business owners have already established a retirement savings plan for their company (e.g., a defined contribution plan, such as a 401(k) plan or SEP-IRA). However, many business owners don’t realize they can also establish a defined benefit plan – a very effective tool for saving a substantial amount of money in a relatively short period of time while significantly lowering individual income tax liability.
Contact MB Actuarial Services to see how we can help you put the power of defined benefit plans to work for your clients.
Yes. A defined benefit plan is a qualified retirement plan in which annual contributions are made to fund a chosen level of retirement income at a predetermined future retirement date. Qualified plan assets are protected from creditors in the event of bankruptcy. Since asset protection is important to most professionals and business owners, it benefits them to move assets from their businesses to an asset-protected vehicle, like a qualified plan, to assure their retirement savings.
Defined benefit plans are ideal for clients who are self-employed or small business owners with high earned income who:
Good client candidates are typically independent contractors, self employed individuals and small business owners. Defined benefit plans can be established for businesses with W-2 employees or for a one person business, an owner and spouse business, or a partnership with no W-2 employees. Sole proprietorships, partnerships, LLCs and corporations (including both subchapter S and C corporations) qualify.
Typical professions include:
Contributions are made according to an actuarial formula to meet the target retirement income benefit. Calculating the annual dollar amount that can be contributed into a defined benefit plan requires a mathematical calculation performed by an actuary considering the client’s age, income, planned retirement age and investment performance. Annual contributions can be well over $200,000.
One of the major advantages of a defined benefit plan is that the contributions are considered business expenses which will lower your client’s net business income and the amount of taxable income. They can often pay for a large portion of the annual contribution simply through the reduction in their income tax liability.
Typically, annual contributions are not discretionary. Clients are obligated to make annual contributions once their plans are established, and they must commit to investing significant amounts each year for the life of their plans. It’s a commitment, but one of the reasons the clients get the reward of significant tax savings. Clients can decide how much of their current income they can comfortably afford to contribute to the plan, in keeping with IRS limits, but once this annual contribution amount is established, then funding a defined benefit plan is fairly rigid and must be made annually.
Yes, defined benefit plans can be offered in combination with other plans and become an even more powerful retirement savings vehicle when combined with other plans.
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