Do Your Clients Need to Defer More?
High earners and Baby Boomers nearing retirement often need to defer more of their income than a 401(k) will allow. For those who have already hit the 401(k) contribution limit, there is still time to set up a Defined Benefit or Profit Sharing Plan for Tax Year 2015.
A Defined Benefit Plan can be a powerful tool to help small business owners maximize their tax-advantaged retirement savings, while minimizing the cost to include employees. Forbes recently called Defined Benefit Plans "The Overlooked Retirement Vehicle For Successful Entrepreneurs."
Who Should Consider a Defined Benefit Plan?
Business owners may be excellent candidates for a plan, even if they already have a 401(k) or IRA in place. A great rule of thumb is that if they are over 40, want to put away more than $50,000, and are willing to put a minimum of 5% towards employee contributions, they should consider a Defined Benefit Plan. Professionals such as entrepreneurs, physicians, dentists, and consultants commonly take advantage of these plans.
How Much Can They Contribute?
The deduction limits for Defined Benefit Plans are based on the individual plan structure and actuarial calculations. Because of recent changes to interest assumptions, tax deductible contribution limits may be 40% higher than they were in past years. In some cases, a business owner earning over $100,000 may be able to defer up to $200,000 per year.
What are the Advantages of a Defined Benefit Plan?
Defined Benefit Plans have several advantages when used alone or in conjunction with a Defined Contribution Plan including tax savings and plan flexibility. By deferring taxes on income and withdrawing assets during retirement when taxable income is likely to be lower, high earners are able to reduce overall taxes. Proper plan design and effective funding strategies can provide owners with the flexibility to contribute a different amount each year.
To learn more about the advantages of a Defined Benefit Plan, read our overview here. If you have prospects or clients that may want to increase their tax-advantaged retirement savings, contact our office today.
The Farmer & Betts team offers the highest level of expertise and service, as well as an ERISA attorney on staff and an experienced compliance department. We are happy to support you with specialized plan design and competitive fees. Call or email us today to learn more.