Many business owners and partners are seeking ways to increase their tax deductions as well as accelerate their retirement savings. A defined benefit plan may be the solution to achieve both objectives.
What is a defined benefit plan?
A defined benefit plan is a qualified plan promising a specific benefit at retirement. For plans designed for business owners and partners, the benefit at retirement is usually a lump sum rolled into an IRA (as opposed to monthly installments usually associated with pension plans). The employer is responsible for contributing enough funds to the plan to pay the promised benefits regardless of profits and earnings. The annual contribution amounts are actuarially determined and are based on a variety of factors (i.e., future pay increases, past investment performance, years until retirement, and life expectancy after retirement). Employer contributions to fund the promised benefits are mandatory.
A cash balance plan is a form of defined benefit plan promising specific contribution credits and interest credits.
Key executives may be able to accelerate their retirement savings. Larger contributions must be made on behalf of older participants because older participants have less working years until retirement. This can benefit key executives, who are often times older than the other participants in the plan.
The business will receive a tax deduction for contributions to the plan. While an owner or partner is able to fund their retirement through the defined benefit or cash balance plan, the business will receive a tax deduction for amounts contributed to the plan.