If you are self-employed, you know that planning for your retirement is entirely your responsibility. And if you’ve experienced financial success as a self-employed professional or small business owner, you know how hard it is to keep your money in the face of high marginal tax rates. Perhaps it’s time to consider an aggressive approach to both funding your retirement and cutting your taxes significantly by starting a Small Company-DB Plan—a defined benefit pension plan.
The good news with defined benefit plans is you can select the investments, for example, mutual funds*, unlike some plans that have been popular lately such as 412(i) and 419 plans. These plans put tax savings ahead of investment selection. There has also been much talk of the tax risks in 412(i) and 419 plans. The last thing you want is to be left with is a poor investment as you enter retirement after you find your tax benefits taken away.
A Small Company-DB Plan is a retirement savings alternative that offers the highest deductible contributions allowed in a qualified retirement plan. Contributions can be three to four times greater than the maximum contributions to a 401(k), Profit Sharing, SEP or SIMPLE Plan. Since all contributions are tax deferred, qualified individuals can cut taxes significantly and direct their tax savings towards their retirement.
Individuals who qualify for a Small Company-DB Plan include sole proprietors and small business owners. Typical candidates for a Small Company-DB Plan include:[bulletlist]
- Business owners, incorporated or proprietors, with five or fewer employees
- Doctors, dentists, lawyers, independent contractors, realtors, and other professionals
- Employees with a side business who receive self-employment income
- Self-employed spouses of high income earners[/bulletlist]
Recent pension legislation has raised the contribution and deductibility limits as well as simplified plan fund requirements, making defined benefit plans like a Small Company-DB much more attractive to small business owners than other types of retirement plans available today. Small Company-DB is not designed for everyone. Defined benefit plans are often more complex and, thus, more costly to establish and maintain than any other types of plans. If you think you fit the profile for this plan, you owe it to yourself to explore the extraordinary advantages of starting a Small Company-DB Plan. For those looking for modest contributions, and no funding requirements, a Small Company 401(k) plan or a SIMPLE IRA may be more suitable. Check with your Certified Financial Planner™ professional.
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