Defined Benefit Plans – A Wealth Accumulation Strategy for High Income Business Owners

With the end of the year approaching, now is the time for high income earners to assess whether a defined benefit plan makes sense.

A defined benefit plan allows the highest deductible contributions of any retirement plan.  This plan allows you to save for retirement on a tax-deductible basis.  Investments made within the plan grow without any current income taxes.  The pension plan allows flexibility as to when you withdraw your money, with small minimum distributions commencing upon reaching the age of 70 ½.

Current IRS regulations allow a participant to fund a lifetime pension of up to $210,000/year beginning at age 62, requiring an accumulation of approximately $2.7 million.  Depending on your age, compensation and selected retirement date, it may be possible to save up to $300,000 per year into a pension plan!*

The amount that you can save annually depends on how close you are to your selected retirement age.  In general, the closer you are to your retirement age, the larger the permitted contribution.

The plan may also provide a valuable life insurance benefit, which is part of the tax-deductible contribution, and provides income tax free (federal and state tax) life insurance benefits to your beneficiary at death.

Upon reaching retirement or termination of the plan, accumulations can be rolled over into an IRA and continue tax-deferred growth.  There is no limit as to how large the accumulation can grow once it is rolled over into an IRA.

Pension assets are generally protected from bankruptcy and from judgments and creditors.  Many professionals appreciate the added asset protection provided by a pension plan.

So, if you are a small business owner, board member, professional (attorney, physician, independent consultant), you owe it to yourself to investigate one of the few IRS sanctioned tax shelters.

Sapers & Wallack is available to provide a custom feasibility study or additional information.


Rollover Considerations
Before rolling assets over from a qualified plan, you should consider various factors. These factors include but are not limited to: Investment Options, an IRA often enables the investor to select from a broader range of investment options; Fees and Expenses, both plans involve investment-related expenses and plan or account fees. IRA fees may be more than your current plan fees; Services, different levels of service may be available under each option; Penalty-Free withdrawals, it may be easier to borrow from a plan and you may be able to withdrawal funds earlier in certain circumstances; Required minimum distributions, if still working at 70 ½ a person is generally not required to make distributions from employer’s plan; Tax considerations, for potential tax considerations you should consult with your tax advisor. Other factors may be relevant when analyzing considerations that might apply to your specific circumstances, you should consult your financial professional.