Because of their relative simplicity and low cost, defined contribution plans, such as SEP or SIMPLE IRAs, or even 401k plans have typically been the default options for small business owners. While they may serve a small business well for a period of time, their contribution limitations can ultimately stifle high earning business owners’ in their effort to retire early or on time. For business owners over age 50 with five or fewer employees, earning $250,000 or more annually, and who have the financial capacity to contribute more than $50,000 each year to their retirement plan, a defined-benefit plan may be the ideal solution.Defined-benefit plans promise a pre-determined amount of income based on a percentage of income a business owner wants at retirement. Alternatively, the income benefit is determined based on the amount of current contributions a business owner can afford to make up to a limit of $210,000.per year.*
Consider the following scenario: Stan is a 53-year-old client who has built a very profitable architectural practice over the last 22 years. Stan takes $250,000 as income from his business and employs two to three part-time staffers. Until now, Stan, who has been focused on paying for his three children’s college education, has saved a minimal amount for retirement using IRAs for himself and his wife. He is now ready to find a retirement plan option that will allow for the largest contribution possible while providing current tax savings so he can retire in the next seven to 10 years.
Maximum Profit Sharing Contribution
Maximum Individual 4O1k Contribution (including a profit sharing element)
Maximum SIMPLE IRA Contribution w/ Catch up
Maximum SEP IRA Contribution w/ Catch up
Maximum Defined Benefit Plan Contribution
Contribution limits for plan year 2014
Which plan is the best option for Stan? Since he would really like to retire within the next 10 years, employs part-time people who may not be eligible for the plan, and has the capacity to continuously fund his plan with the maximum contribution, the defined-benefit plan would provide the best opportunity to achieve his goal. Of course, there are many other factors to consider in choosing a defined benefit plan as your retirement plan option.
We invite you to get on our calendar for a free evaluation to determine whether a defined benefit plan is right for you.