There was a time not too long ago when a Defined Benefit Plan was the main pension retirement plan in the United States. That no longer is the case, as corporations have been slowly discontinuing the defined benefit plan.
The reason corporations are dumping defined benefit pension plans is that the funding requirements are much too costly for the corporation.
The defined benefit plan starts with an exact future yearly retirement amount (the "defined benefit") that the employee is to receive at the time of their retirement.
A defined benefit plan could be appropriate for a high profit small business owner who does not have any other employees. Since the targeted defined retirement benefit for a business owner can be over $200,000 per year, the deductible yearly retirement contribution can be very large.
The 2018 benefit limit set by the IRS is $220,000. The IRS has announced that the 2019 benefit limit will increase to $225,000.
The yearly defined benefit contribution will even be greater if you are closer to retirement age. The reason it will be greater is because there will be fewer years in which to make retirement contributions to fund your defined benefit -- thus resulting in a higher required contribution for each year.
If you have a high income from your small business, you should definitely consider a defined benefit plan -- the income tax deductions may considerably reduce your taxable income.
Having a pension specialist design your defined benefit plan will involve some cost, but the income tax savings could offset that cost many times over.
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It is cheaper for the corporation to offer a 401k plan with some type of corporate matching contribution for the employee.
The Defined Benefit Plan though, is still the main pension retirement plan for union employees; police and fire department employees; and state and local government employees.
Public Defined Pension plans are under attack in many states across the country. States can no longer afford to fund these pensions. They are trying to decrease the amount of the pensions and also asking for the employee to contribute more towards their own pension.
Even the defined benefit plan for Federal government employees has been scaled down. Federal employees now have an employees thrift plan which is similar to a 401k plan.
What is a Defined Benefit Plan?
Defined Benefit Limits For 2018 and 2019
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The yearly contribution that is needed to fund the future retirement benefit is then calculated and contributed to the Defined Benefit Retirement Plan. The yearly contribution is calculated using complex actuarial methods and tables.
The defined benefit plan requires a professional specialist for the design and the ongoing maintenance of the plan.
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