You’ve worked hard, built a successful business. But when you think about the future, the thought of escalating your retirement savings may be forefront in your mind. If that’s the case, you might want to consider a Defined Benefit Plan to possibly double your savings in half the time. Yes, you heard right. But there are many things to consider before you decide if a Defined Benefit Plan is right for you and your business.
A Defined Benefit Plan usually works best for independent contractors, consultants, physicians, real estate agents, and sales reps; employed individuals who also receive self-employment income; owner-only, owner/spouse or family businesses; as well as self-employed spouses of high-income earners. Tax savings are achieved by allowing large tax-deductible contributions in order to keep more of what you earn while accumulating retirement wealth faster.
Because a Defined Benefit Plan needs to reach a pre-determined dollar amount to provide the required annual payment in retirement, annual contributions (determined by age, investment return, and other factors) can be quite high. For business owners in their 50’s just establishing a plan, the annual contributions needed to reach the plan’s retirement goal could be in the six-figure range. But, because all contributions are tax-deferred, the tax-savings could outweigh any higher administration costs that might be associated with managing the plan.
Despite these pros, Defined Benefit Plans do have some cons. 100% funded by required annual employer investments, business owners must meet minimum funding requirements each year regardless of whether the year has been profitable. Administration fees are higher than 401(k) Plans and should be thoroughly investigated prior to committing to this course of action.
Often referred to as a pension fund, the Defined Benefit Plan was once the standard for businesses to provide benefits for employers and employees. Today, they have been largely replaced by Defined Contribution Plans (such as the 401(k)) due to lower administration fees, greater flexibility in pre-tax employee contributions and employer matching programs. Even so, they can still make sense by offering dramatic tax savings and retirement wealth accumulation for high-income self-employed individuals, professionals and small business owners, especially those over 50.
If you’ve procrastinated or want to quickly increase your retirement wealth, the high-tax advantaged contributions required in a Defined Benefit Plan can help you get caught up pretty fast while significantly lowering your yearly tax bill. Just remember, Defined Benefit Plans are more complicated to administer and many employers or business owners opt to hire a professional financial advisor to oversee them. While that is highly-advisable, be prepared to factor in set-up and administration fees for on-going management.
Questions? At Tax Savings Professionals, we would be happy to provide answers and help you decide if a Defined Benefit Plan in Vero Beach, FL is right for your business and your future. Give us a call at (772) 257-7888 today. Or you can use our convenient Contact form.