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Retiring Smart – Do You Have the Best Plan for You and Your Business?

Retirement

By: Steve Dumstorff

Feeling constrained on how much you can put away in annual retirement plan contributions?   Did you know you can have more than one qualified retirement plan for your business?  Defined Benefit plans are making a bit of a comeback for business owners looking to accumulate a larger pool of liquid retirement wealth.  Most business owners have established Defined Contribution plans for their businesses (401Ks, Profit Sharing Plans, SIMPLE Plans, SEP Plans, and so on), but these plans all have annual additions limits that often constrain the amount highly profitable business owners would like to put away for their own retirement.

A defined benefit plan considerably lowers your current tax costs as you set aside profits for your retirement. Although this is permitted by other retirement vehicles as well, the contribution limitations for defined benefit plans can be tremendously larger. Just like defined contribution plans, defined benefit plans also provide tax-deferred growth on the asset earnings inside the plan. Your money is not taxed until taken out of the plan and you start spending the funds in your retirement years.

If you own a highly profitable business and your employee census situation fits right, adding a 2nd retirement plan to your business could be the perfect vehicle to make a heavy push to accumulate those large retirement account balances you desire in a shorter time.  Some qualifying factors need to be met when considering a defined benefit plan.

2 Important Qualifying Factors

  • Highly Profitable Business

While technically any business owner can seek to exercise this plan, it will only work well if you have the profitability expectations and a commitment to contribute a chunk of those profits to the newly defined benefit plan for several years. 

  • Mature Age

Are you 50 years of age or older? Since defined benefit plan contributions take into consideration the number of years you have available before you retire, the fewer the number of years until retirement age, the larger the contribution limits will be for your plan benefit.  In some cases, these plans can boost your retirement contributions by an extra $150,000+ annually. Think of the difference that would make in your liquid retirement asset accumulation in just a few years!

1 Special Situation Factor

  • Solo Employee Self-Employed Business Owner

While somewhat unique to have a business owner as the sole employee of their own business, the plan design and implementation is much simpler in this unique situation.  After all, there are no other employees, so plan contributions would be allocated to the sole employee (the business owner).  In this situation, you need a high expectation to continue to be profitable, the business owner needs to be of an age that produces a relatively short period until retirement, and the business owner needs the desire to build a large liquid retirement asset nest egg.

However, there are instances when a defined benefit plan is not a good fit. The plan would not be your best choice if you have a constant ebb and flow in profit margins.  Employers are required to contribute a specific amount to this plan each year, whether you are profitable or not.

Expert Guidance

At KEB we want to make sure you are getting the most out of your retirement. You have worked hard for your business, and we want to make sure your business works hard for you. Maybe this is the first time you have heard about this type of retirement plan, or maybe you just don’t know how to get started. There are a lot of factors to consider when deciding what is best for your future. The experts at KEB are here to help. We can look at your specific business goals and help you create the perfect retirement plan for you and your family.

Give us a call today or visit our website: kebcpa.com