The Personal Defined Benefit Plan
By Nicholas Guido, CFP®October 17, 2018
Personal Defined Benefit Plan
Qualified retirement plans are divided into two main types:
A defined contribution plan is one that focuses on what you put into the account. 401(k)'s are examples of defined contribution plans. The defined benefit plan, on the other hand, focuses on what you receive during retirement. A pension plan is a primary example of a defined benefit plan.
Defined benefit plans have mostly disappeared from businesses, but that does not mean that they no longer exist.
A Defined Benefit Plan helps you, the self-employed and small business owner, save aggressively for retirement by allowing you to make very high contributions. With this type of plan you can target a desired level of retirement income. Each year, contribution amounts are adjusted to help you reach your targeted income level.
A Defined Benefit Plan helps you, the self-employed and small business owner, save aggressively for retirement by allowing you to make very high contributions.
When making a contribution to a Personal Defined Benefit Plan the contributions are 100% tax-deductible, within IRS limits, and earnings grow tax-deferred until they are withdrawn.
Benefits
- Substantial benefits can be provided and accrued within a short time period.
- Self-employed individuals or small business owners can contribute (and deduct) more than under other retirement plans.
- Vesting can follow a variety of schedules from immediate to spread out over seven years.
- The annual benefit for a self-employed individual or small business owner under a defined benefit plan cannot exceed the lesser of:
- 100% of the self-employed individual or small business owners average compensation for his or her highest 3 consecutive calendar years or $220,000 for 2018.
Potential Hurdles
- An excise tax applies if the minimum contribution requirement is not satisfied.
- An excise tax applies if excess contributions are made to the plan.
- Generally, a Defined Benefit Plan may not make in-service distributions to a participant before the participant reaches age 62.
- Must file a Form 5500 annually.
Contributions
Contributions to a Defined Benefit Plan are based on what is needed to provide a determinable benefit to the self-employed individual or small business owner. Actuarial assumptions are required to determine the contribution levels.
Payment Options
Payment options in a defined benefit plan will commonly include a single-life annuity, which provides a fixed monthly benefit until death; a qualified joint and survivor annuity, which offers a fixed monthly benefit until death and allows the surviving spouse to continue receiving benefits until death; or a lump-sum payment, which pays the entire account value of the plan in a single payment.
Selecting the right payment option is important because it can affect the benefit amount the participant will receive and can also drastically affect the taxes consequences of the payments.
These plans can be established with many different specifications and guidelines within them. One of the many things to think about in plan creation and/or optimizing your current plan is whether working an additional year will increase your benefit based on the benefit formula used. This extra year may also increase the final salary that will be used when determining your benefit.
Conclusion
A Defined Benefit Plan is not always the best solution for a self-employed individual or small business owner but if it is, there are substantial benefits in understanding the plan and proper plan construction. Typically, a self-employed individual or small business owner who is establishing a personal Defined Benefit Plan will want to pair this plan with a 401(k) and Profit Sharing plan to maximize all of the tax-deferral they can.
Our recommendation for self-employed individuals or small business owners is to reach out to a financial professional at Chicago Partners Wealth Advisors to determine if a defined benefit plan is a fit for your financial situation.
Nicholas Guido, CFP® is a Senior Advisor at Chicago Partners Wealth Advisors. He leverages his 7 years of financial experience to help clients build comprehensive financial plans & investment portfolios.
1Zweig, Jason, Value Should Do Better. But When Is Anybody’s Guess, Wall Street Journal, April 27, 2018.
2JPM Guide the Markets, U.S., 2Q 2018, as of March 31, 2018, p 9.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.
October 17, 2018
Personal Defined Benefit Plan
Qualified retirement plans are divided into two main types:
A defined contribution plan is one that focuses on what you put into the account. 401(k)'s are examples of defined contribution plans. The defined benefit plan, on the other hand, focuses on what you receive during retirement. A pension plan is a primary example of a defined benefit plan.
Defined benefit plans have mostly disappeared from businesses, but that does not mean that they no longer exist.
A Defined Benefit Plan helps you, the self-employed and small business owner, save aggressively for retirement by allowing you to make very high contributions. With this type of plan you can target a desired level of retirement income. Each year, contribution amounts are adjusted to help you reach your targeted income level.
A Defined Benefit Plan helps you, the self-employed and small business owner, save aggressively for retirement by allowing you to make very high contributions.
When making a contribution to a Personal Defined Benefit Plan the contributions are 100% tax-deductible, within IRS limits, and earnings grow tax-deferred until they are withdrawn.
Benefits
- Substantial benefits can be provided and accrued within a short time period.
- Self-employed individuals or small business owners can contribute (and deduct) more than under other retirement plans.
- Vesting can follow a variety of schedules from immediate to spread out over seven years.
- The annual benefit for a self-employed individual or small business owner under a defined benefit plan cannot exceed the lesser of:
- 100% of the self-employed individual or small business owners average compensation for his or her highest 3 consecutive calendar years or $220,000 for 2018.
Potential Hurdles
- An excise tax applies if the minimum contribution requirement is not satisfied.
- An excise tax applies if excess contributions are made to the plan.
- Generally, a Defined Benefit Plan may not make in-service distributions to a participant before the participant reaches age 62.
- Must file a Form 5500 annually.
Contributions
Contributions to a Defined Benefit Plan are based on what is needed to provide a determinable benefit to the self-employed individual or small business owner. Actuarial assumptions are required to determine the contribution levels.
Payment Options
Payment options in a defined benefit plan will commonly include a single-life annuity, which provides a fixed monthly benefit until death; a qualified joint and survivor annuity, which offers a fixed monthly benefit until death and allows the surviving spouse to continue receiving benefits until death; or a lump-sum payment, which pays the entire account value of the plan in a single payment.
Selecting the right payment option is important because it can affect the benefit amount the participant will receive and can also drastically affect the taxes consequences of the payments.
These plans can be established with many different specifications and guidelines within them. One of the many things to think about in plan creation and/or optimizing your current plan is whether working an additional year will increase your benefit based on the benefit formula used. This extra year may also increase the final salary that will be used when determining your benefit.
Conclusion
A Defined Benefit Plan is not always the best solution for a self-employed individual or small business owner but if it is, there are substantial benefits in understanding the plan and proper plan construction. Typically, a self-employed individual or small business owner who is establishing a personal Defined Benefit Plan will want to pair this plan with a 401(k) and Profit Sharing plan to maximize all of the tax-deferral they can.
Our recommendation for self-employed individuals or small business owners is to reach out to a financial professional at Chicago Partners Wealth Advisors to determine if a defined benefit plan is a fit for your financial situation.
Nicholas Guido, CFP® is a Senior Advisor at Chicago Partners Wealth Advisors. He leverages his 7 years of financial experience to help clients build comprehensive financial plans & investment portfolios.
Important Disclosure Information
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.