Could You Create Your Own
SBOs are taking a new
look at old-school defined benefit plans.
Provided by MidAmerica Financial
Contrary to popular belief, classic pension plans
have not disappeared. Corporations have mostly
jettisoned them, but highly profitable small businesses are giving them a
second look. Why are small business owners deciding to adopt old-school,
employer-funded retirement plans?
The tax breaks attached to a defined benefit plan
may be substantial. In fact, if these plans are
funded with insurance contracts or guaranteed insurance products, plan
contributions made by the owner become tax-deductible for the business.1
There is no cap on how much you can save. IRAs, 401(k)s, and SEPs all have annual contribution limits.
Traditional employer-funded pension plans do not. Business owners have the
potential to accumulate millions for the future through such a vehicle.
the record, the IRS does limit the yearly retirement income that a participant
in a defined benefit plan may receive. In 2017, the pension benefit resulting
from such a plan may not exceed a) $215,000 or b) 100% of the participant’s
average compensation across his or her three highest-paid consecutive years of
you are earning well into six figures and you are 45 or older, you may have
entered the “sweet spot” when it comes to defined benefit plans. You will
presumably be in your peak earning years, and yet you may need to accelerate
retirement savings. A defined benefit plan offers you the possibility to do
What are the downsides? Cost and complexity. Actuaries have to be involved (and paid) when you
have one of these plans; you need an actuary to perform regular and annual
calculations and valuations to see that the plan is being properly funded. In
addition, the pension benefits need to be insured through the federal
government’s Pension Benefit Guaranty Corporation (PBGC), and in exchange for
that service, the business must pay the PBGC annual premiums.2,3
actuary must determine the annual employer contribution amount needed to fund
the plan (typically adjusted yearly in light of investment performance) and the
actuarial formula used to make contributions per worker. The business must fund
the plan annually, regardless of how well it is doing.4
What businesses are bad candidates for defined
benefit plans? If you have a small firm with
ten or more employees, or if most of your employees are older or high-salaried,
these plans may be a poor choice. That is because the employer contributions
could be very expensive, even if you opt for vesting.1,3,4
What businesses are good candidates? Accounting, consulting, and medical practices are often good fits for
these plans; seeing how many baby boomers have elected to continue working as
consultants, you may see interest rising in them during the coming years.1,3,4
Financial Resources may be reached at 618.548.4777 or firstname.lastname@example.org. www.mid-america.us
This material was prepared by MarketingPro, Inc., and does not
necessarily represent the views of the presenting party, nor their affiliates.
This information has been derived from sources believed to be accurate. Please
note - investing involves risk, and past performance is no guarantee of future
results. The publisher is not engaged in rendering legal, accounting or other
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the services of a competent professional. This information should not be
construed as investment, tax or legal advice and may not be relied on for the
purpose of avoiding any Federal tax penalty. This is neither a solicitation nor
recommendation to purchase or sell any investment or insurance product or
service, and should not be relied upon as such. All indices are unmanaged and
are not illustrative of any particular investment.
and advisory services offered through National Planning Corporation (NPC),
Member FINRA/SIPC, a Registered Investment Adviser.
MidAmerica Financial Resources and Malan Financial Group are separate and
unrelated companies to NPC.
1 - investopedia.com/terms/1/412i.asp [12/20/16]
2 - irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-plan-benefit-limits