A defined benefit plan is an IRS-approved qualified retirement plan that has much higher tax-deductible contribution limits than are permitted in either a SEP-IRA or 401(k) plan. Contributions to defined benefit plans are deductible against taxable income and can potentially reduce income tax liability by $40,000 or more annually. The current IRS limit for how much a defined benefit plan owner can accumulate in a plan is $2.36 million.
The maximum annual contribution amount varies with each client’s specific circumstances and is calculated using actuarial formulas based upon:
- Age — Typically, the older the plan owner, the higher the maximum contribution limit will be, as the owner will have fewer years to contribute
- Income — Eligible compensation differs based on the owner’s type of income
- Years Until Retirement — Typically, the fewer the plan owner’s years until retirement the higher the maximum contribution limit
Also of note…
Plans Have Lots of Flexibility
Plan assets may be invested in a wide range of marketable securities. Investments with low volatility are generally recommended, especially during the last few years of the plan.
For Even More Tax Savings…
Our small business defined benefit plans can, in some circumstances, be combined with 401(k) plans to allow even higher tax-deductible contributions.
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