When we first start going into the details of defined benefit (DB) plans with people who are good candidates for them, we often run into skepticism. How can it possibly be legal to make a $100,000+ tax-deductible contribution to a retirement plan and possibly save $40,000 or more in taxes each year?
Well, it is possible, and it is legal. For individuals with high income from self-employment, this powerful tool can cut the tax they pay by tens of thousands every year. So, if you are self-employed or own a small business and make more than $100,000 each year, you are probably paying tens of thousands of dollars more in tax each year that you need to.
Why Haven't I Heard of Defined Benefit Plans?
Many people don’t know about DB plans. There is not much written about them in the financial press or in articles titled “Tax Saving Tips”. Why? Because they are not suitable for much of the population. For financial writers, it is far easier to generate interest for an article about 401(k)s or SEP-IRAs, which are relevant to a broad swath of the population. Therefore, not many articles are written about these specialized and boring sounding defined benefit plans. In fact, not many accountants or financial advisors know much about them or routinely use them for clients.
So, What is a Defined Benefit Plan?
Defined benefit plans have been around for decades and are qualified IRS-approved retirement plans. In many ways they are like an Individual 401(k) Plan on steriods. They are perhaps the most powerful financial tool for high-earning self-employed individuals who want to save on taxes and rapidly build a large retirement nest egg. If you are one of the lucky 5% of the population that can take advantage of a DB plan, you should give it serious consideration.
There are a couple of things about DB plans you should know at the outset.
- First, because each DB plan is created specifically for a certain person’s circumstances, it costs money to set up and to administer. There is simply more paperwork involved than with an Individual 401(k) or SEP-IRA.
- Second, DB plans are more of a commitment than 401(k)s or SEP-IRAs because DB plans require annual contributions.
The drawbacks of DB plans, however, pale in comparison to the significant tax savings they can enable. As an example, a self-employed consultant who puts $170,000 into her DB plan could potentially save roughly $60,000 in taxes!
Is a Defined Benefit Plan Right For You?
If you make over $100,000 in self-employment income, are over 40 and are willing and able to make large contributions to you could be a great candidate.
You could be saving tens of thousands on your taxes every year.
Schedule a call with us and we can generate a complimentary tax-saving proposal for you.
Want more information about how people like you can save? Read more.