Reasons to set up a Self Employed Defined Benefit Plan

  1. Small Business Owner Gets Most of the Defined Benefit Assets

In the right circumstances and with the expertise of theCPAaid experts, it is indeed possible to allocate a significant portion, ranging from 80% to 95% or more, of employer contributions to the business owner. By leveraging the knowledge and guidance of professionals, the cost of providing employee benefits can be outweighed by the reduced income taxes, resulting in a net savings for the business owner.

The specific proportion that the owner can receive from employer contributions depends on several factors, such as the owner's age, earned income, whether the owner's spouse is an employee, the number of employees, and the ages and compensation of the staff.

To determine the optimal allocation and assess the potential tax deduction, it is highly recommended to run an illustration with the assistance of theCPAaid experts. This analysis will not only quantify the tax benefits but also provide insights into the corresponding cost of providing staff benefits. Armed with this information, you can make an informed decision about whether implementing a Defined Benefit Plan will be cost-effective and advantageous for your business.

  1. Defined Benefits Provide Creditor Protection

Defined Benefits are protected from creditors in the event of bankruptcy. The ability for you to shift business assets, which are subject to seizure, to a protected Defined Benefit asset is a huge advantage.

  1. Self Employed Defined Benefit Plans Allow Large Tax-Deductible Contributions

Self Employed Defined Benefit Plans offer significant tax advantages for self-employed individuals and small business owners. With higher contribution limits compared to other retirement options, these plans allow contributions ranging from $100,000 to $250,000+ per year.

What sets Defined Benefit Plans apart is their flexibility. Small business owners can adjust contribution amounts annually based on their specific circumstances, such as cash flow and taxable income. This flexibility, combined with substantial tax deductions, enables strategic retirement savings.

  1. Contributions Grow Tax-Deferred

Defined Benefit Plans offer tax-deferred growth, preserving the value of investment gains until distribution. This tax advantage protects retirement savings from erosion and allows for a larger asset base and higher returns over time. Combined with the substantial contributions allowed in these plans, small business owners can rapidly accumulate significant retirement assets.

  1. You Can Roll Over Defined Benefits at Retirement

Upon retirement or Plan termination, small business owners can receive their Defined Benefit Plan assets in a single sum distribution and roll them over into an IRA for continued tax deferral. This allows retirement funds to last longer and potentially provides a higher retirement income. By taking advantage of tax deferral both during and after retirement, business owners can maximize their savings and secure a more financially secure future

  1. You Can Add a 401(k) Plan for Additional Tax Savings

Pairing a Defined Benefit Plan with a 401(k) Profit Sharing Plan is an excellent strategy for self-employed individuals and small business owners who want to contribute even more towards their retirement savings. By combining these two plans, it's possible to maximize deductible contributions. In fact, the addition of a 401(k) Profit Sharing Plan can potentially allow for an extra $49,800 per year in contributions. This powerful combination offers enhanced savings opportunities and greater flexibility for retirement planning.

  1. Self Employed Spouses Further Increase Tax Deductions

By including the small business owner's spouse as an employee, contributions to Defined Benefit Plans can be further increased, potentially even doubled. The exact deductible contribution for the spouse will depend on various factors. However, the ability to amplify an already substantial deduction is truly impactful. For business owners and spousal employees nearing retirement, total contributions to Defined Benefit Plans and 401(k) accounts could reach an impressive $900,000 or more, especially if contributions are front-loaded. This presents an exceptional opportunity to significantly boost retirement savings.

  1. Defined Benefit Plans Are Not Subject to the 25% of Compensation Limit

Unlike SEPs or 401(k) Plans, Defined Benefit Plans offer the advantage of not being limited to 25% of compensation for employer contributions. This flexibility sets Pension Plans apart from other retirement options, allowing for much higher contributions relative to the level of compensation.

In fact, it's quite common for Pension contributions to far exceed the 25% limit. This becomes particularly advantageous when a business owner desires to contribute a significant portion of their income to the Defined Benefit Plan. This scenario often arises when the business income is not required for living expenses, such as when there are alternative income sources or when the business serves as a secondary venture. In such cases, the business owner can prioritize saving a substantial portion of the business income, which is typically not possible with other retirement Plans. In contrast, a Defined Benefit Plan enables the business owner to contribute a large proportion of their earned income, maximizing their retirement savings potential

  1. Shorter Horizon? Make Up for Lost Time

Defined Benefit Plans offer a unique advantage to self-employed individuals nearing retirement age. In just 10 years, a business owner can contribute towards an age-62 balance of $3.4 million, regardless of their current age.

This accelerated accumulation of retirement savings is not possible with other retirement arrangements. For instance, 401(k) plans only allow limited "catch-up" contributions of $7,500 per year.

With Defined Benefit Plans, small business owners have the opportunity to rapidly boost their retirement savings. Contributions of approximately $250,000 per year for 10 years can be made, assuming a 5% rate of return. Additionally, if the owner's spouse is also an employee, the permissible contribution could potentially double.

  1. Longer Horizon? Contribute More for Compounded Growth

Defined Benefit Plans offer significant advantages even for younger self-employed individuals.

For business owners in their 30s, these plans allow for deductible contributions that exceed those of other retirement vehicles. In fact, a 35-year-old could potentially save $100,000 or more per year through a Defined Benefit Plan. This contribution amount can be further increased if the spouse is also an employee and by adding a 401(k) Plan to the mix.

By making substantial contributions at a younger age, the business owner benefits from the power of compounding returns over a longer time period. This advantage significantly reduces the cost of funding for retirement and provides a solid foundation for future financial security.

  1. Defined Benefits Create Employee Engagement and Retention

When deciding between paying income taxes to the IRS or providing benefits to employees, it is generally more advantageous for a business owner to choose to fund employee benefits. Paying unnecessary taxes does not benefit the business owner directly, whereas investing in employee retirement benefits can lead to increased appreciation, engagement, and retention among employees.

By adopting a Defined Benefit Plan, which often requires covering a portion of employees, business owners can allocate funds towards employee benefits instead of paying higher income taxes. In many cases, the tax savings achieved through a Defined Benefit Plan are significantly higher than the cost of providing the required employee benefits. This not only benefits the employees but also contributes to stronger profitability and growth for the business.

Ultimately, choosing to invest in employee benefits can yield greater returns in terms of employee satisfaction, loyalty, and overall business success.

  1. Loan Option is Available in Self Employed Defined Benefit Plans

To the self employed, cash is king, and the ability to access cash at the right time may mean the difference between success and failure. Even business owners with predictable incomes experience financial pressure when economic conditions deteriorate. As a result, tying up large contributions in a retirement plan can be a concern for many business owners, even when they receive a large tax advantage.

What is the solution? Fortunately, Defined Benefit Plans, like 401(k) Plans, can permit loans. While a loan provision in a Defined Benefit Plan has its drawbacks, providing for the option can make sense in the right circumstances.