Defined Benefit Pension Plan
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 in favor of a 401k salary deferral plan or a 401k plan in combination with another retirement plan such as a Profit Sharing Plan.
The reason corporations are dumping defined benefit pension plans is that the funding requirements are much too costly for the corporation. 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. Even the defined benefit plan for Federal government employees has been scaled down to now include an employees thrift plan.
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Defined Benefit Retirement Plan
Defined Benefit Plan For Your Small Business
What is a Defined Benefit Plan?
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. 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.
Defined benefit plan for high income individuals
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 as much as $195,000 per year, the deductible yearly retirement contribution can be very large. The 2009 limit set by the IRS is $195,000 and generally increases every year. The 2010 limit has now been released by the IRS and it remains unchanged from 2009 because the cost-of-living index has not increased. 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.
