Are you a small business owner? Do you need to reduce your tax bill and save for retirement?
A defined benefit plan may be the right choice for you!
A defined benefit plan is a type of employer-sponsored pension plan in which your benefits are calculated based off a participant’s age and salary. This differs from defined contribution plans where your benefit is based off of your actual savings rate and investment returns.
In a defined benefit plan the formula for retirement benefits is set up in advance. This is the exact opposite of defined contribution plans (such as a 401k plan) where the contributions are known in advance, yet the benefit is based on investment returns.
The other factor which sets defined benefit plans apart is the benefit formula applies to multiple employees’. In a defined contribution plan, the benefit varies based on how well the participants investments perform, the savings rate, and the company match.
Most often the “defined benefit” is based off of the employee’s final few years of employment income. Luckily for employees of a small business, this benefit is generally funded by the employer with no employee contributions.
For employers, the benefit is funded out of their own pockets (the business owners). The good thing for a small business owner is a defined benefit retirement plan generally allows for the majority of contributions to be applied to the older, more highly-compensated employees (typically the business owner).
Contributions to a defined benefit plan are tax deductible; however, benefits are taxed when received during retirement.