Business owners look for ways to maximize their retirement savings and maximize their tax deductions. As a business owner, you can contribute up to $265,000 per year to a tax-deductible retirement plan, far beyond what most traditional plans allow.
But is this advanced strategy right for your business? Let’s break down what you need to know before taking the next step.
Need to multitask? Listen to the full 14 minute podcast episode on Apple Podcasts or Spotify.
What Exactly Is a Defined Benefit Plan?
A defined benefit plan is a type of employer-sponsored retirement plan where the company makes contributions on behalf of employees. Unlike a 401(k) or IRA, the employer, not the employee, bears the responsibility for funding the plan and guaranteeing the benefit. These plans were once common but have become rare, largely due to their complexity and cost.
Defined benefit plans can be used alongside other retirement packages, not necessarily as replacements. In fact, there are over a dozen different retirement plan types, and this is considered the “crème de la crème” for those who qualify.
Who Should Consider a Defined Benefit Plan?
This strategy works best for businesses with:
- Owners or leadership who are more established in their careers
- A broader team that tends to be earlier in their professional journey and at different compensation levels
It’s not a one-size-fits-all solution. The only way to determine if a defined benefit plan is right for you is to run detailed actuarial calculations based on your employee census, ages, compensation, and business stability. This is where expert guidance is crucial.
Key Considerations Before You Dive In
- Long-Term Commitment: You must be ready to contribute for at least three years, and ideally five, to make the most of the benefits and avoid penalties. This is not a strategy for a single windfall year.
- Due Diligence and Compliance: Setting up a defined benefit plan involves complex actuarial work, meticulous record keeping, and strict adherence to federal regulations. The penalties for missteps can be steep, so working with a qualified advisor is essential.
- Cost vs. Benefit: These plans are more expensive to set up and maintain than IRAs or 401(k)s. It’s important to weigh the potential tax savings and retirement benefits against the administrative costs.
What Do You Need to Get Started?
If you’re curious about whether a defined benefit plan could work for your business, here’s what you’ll need:
- A clear idea of how much you want to contribute each year, not just this year, but for several years to come
- An employee census: a list of all employees, their compensation, ages, and tenure
From there, an advisor can help you run the numbers and determine if the plan makes sense for your situation.
Common Questions and Real-World Advice
Many owners get excited about the possibility of large tax deductible contributions, but it’s important to approach this with realistic expectations. You don’t have to contribute the full $265,000; many businesses benefit from contributing $100,000 or $130,000 per year. If your spouse is on the payroll, they may also qualify, increasing the plan’s potential benefit.
Above all, ensure your business has the stability to sustain these contributions over time, and never jeopardize your company’s health for a tax break. Compliance is critical, and penalties for mistakes can be severe, so be careful.
Follow Harry Plack on LinkedIn or Facebook for more insights on making more money, paying less tax, and living life better.
Plack Group: Who We Are
Founded on a simple yet powerful principle – helping people – Plack Group is more than just an accounting firm. We create effective solutions that embody your core values and beliefs. From our home in Bel Air, Maryland, we’re proud to serve kind and dedicated clients across the United States.
We’ll say what others might not: we love our clients. Our commitment extends far beyond tax returns and financial analysis. We offer the same thoughtful guidance and strategic advice we’d give our own family.
At Plack Group, we take a highly personalized approach to helping our clients succeed. No two businesses or people are alike, so why would we treat them that way? We specialize in complex tax scenarios for individuals in the highest tax brackets and business owners. Our experienced team of CPAs, accountants, and consultants find solutions and tax strategies others miss.
If you’re a high-achiever, forward-thinker, actively engaged in your business, and want to prioritize your family, Plack Group is your right fit. We work with you to create a strong financial future that reflects your personal faith, values, and beliefs.
