It's Not Too Late to Save for Retirement

A defined benefit plan can supercharge your savings and reduce your taxable income.

A recent Gallup poll indicates that retirement savings are thetop financial worry for Americans, with 52 percent citing concernover the size of their nest egg. For the significant baby boomergroup on the cusp of retirement, this concern may be less about theincome they have available to save and more about the short timethey have left to save it.

Small-business owners with significant excess income, say$50,000 or more annually, are finding the $44,000 to $49,000 annual401(k) limit to be, well...limiting. Many entrepreneurial boomersstarting late in the game can only hope to accumulate $500,000 or$600,000 for retirement under these limits, money that won'teven start to cover a retiree's cost of living expenses, letalone finance the fishing cabin.

But there is another option. Business owners in theirfifties can leverage the high contribution limits of a definedbenefit plan to contribute up to $200,000 annually, tax-deferred,toward retirement. The defined benefit plan, which can often be setup to work in conjunction with an existing 401(k) plan, is a greatway for business owners aged 40 and older to pump up theirretirement savings during their peak earning years.

What does age have to do with it? Unlike a 401(k) plan, which isa type of defined contribution plan, the defined benefit plan haslimits imposed on the ultimate benefit that can be received.Business owners who have less than twenty years left untilretirement have relatively few years to fund toward this maximumbenefit, and thus can contribute significantly more each year.Typically, the older an owner is, the higher the resulting maximumcontribution tends to be.

What types of businesses use defined benefit plans? Professionalservice firms, law firms and physician groups are ideal candidates.Independent consultants, manufacturers' reps, multilevelmarketers and realtors are also well suited, but virtually anyprivately held business with excess earnings might benefit.Supplemental income from speaking engagements, book sales,consulting or director's fees can often be earmarked almostentirely for plan contributions.

Defined benefit plans have actually been around for decades, butthey generally required an actuary or other pension consultant tobe directly involved in the set up. The process was complicated,the timetable was long, and the plan design and maintenance wasoften quite costly.

Tax law changes in the late 1990s, along with new technology,have combined to change all that. Business owners can now set upplans directly through their own tax or financial advisors entirelyonline or by calling a customer support number and joining a webcast directed by a qualified plan specialist. A sole proprietor canbe set up with a plan in a matter of minutes, and a business withmultiple owners and employees can often get set up in just a fewhours. These types of plans are generally simple and easy tounderstand, they're quick to set up, and consequently,they're less expensive to the end consumer.

Defined benefit plans do come with some considerations, however.First, like all qualified plans, including 401(k) plans, ownersmust provide a certain level of benefits to their employees. Whiletoday's defined benefit plans are generally designed to varycontribution levels among owners to meet different financialobjectives, employees need to be provided with an acceptable levelof benefits to meet strict IRS nondiscrimination requirements. Thegood news is, they can be combined with an existing 401(k) orprofit-sharing plan, which results in total employee costs ofaround 6 to 8 percent of their annual salary.

Second, owners must intend to fund the plan at some meaningfullevel for at least the next five years. This is an inexact IRSstipulation designed to ensure that pension plans contain somedegree of "permanency." Exceptions are available for"business reasons," such as the sale of the business orthe retirement of the key person.

Finally, unlike a SEP or 401(k) plan, contributions to a definedbenefit plan aren't purely discretionary. Instead, owners areexpected to contribute a set amount or a percentage of income eachyear. If circumstances change and business owners need to altertheir contribution structure, they can always amend their plandocument.

So what happens when an owner retires? Typically, the plan isterminated and distributions from the plan are rolled over into anIRA. Withdrawals from the IRA are then set to meet theretiree's preference, subject to applicable restrictions.

If you're curious about just how much you can contributeto a defined benefit plan each year, this calculator will help you determine just how muchof your income you can defer to the plan.

Jeff Berends is executive vice president ofCCA Small Business Group LLC and co-developer of the MyMax plan forindividuals and the OurMax plan for small businesses. Berends, whohas designed small-business defined benefit plans for more than 25years, can be reached at jberends@ccasbg.com.

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Thought Leaders

The Collapse of Credit Suisse: A Cautionary Tale of Resistance to Hybrid Work

This cautionary tale serves as a reminder for business leaders to adapt to the changing world of work and prioritize their workforce's needs and preferences.

Business Solutions

Learn to Build a ChatGPT Bot for Only $30

If you want to see what AI can do for your business, grab this course bundle today.

Data & Recovery

If You Have a Business, You Have Passwords to Manage

How a password management system is crucial for entrepreneurs.

Business News

'I Don't Feel Like It's Unreasonable': A-List Actor Refused Service At Hotspot For Not Following Dress Code

Academy Award-winning actor Russell Crowe had quite the afternoon after trying to stop at a Japanese steakhouse in Melbourne, Australia following a game of tennis.

Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.