Taxpayers are generally familiar with any number of retirement savings vehicles which the law allows, ranging from the simplest and probably most common “Individual Retirement Account” (IRA) to plans with more exotic — and potentially tax beneficial — characteristics. One of these is the “defined benefit plan,” which can, in the right circumstances, provide even smaller businesses which surprisingly attractive income tax benefits.
A defined benefit plan has its name because it is built around the desired amount of annual pension plan distribution which the retiree will want to receive in retirement, rather than plans formulated from the front end, by defining up front the periodic plan contribution. These plans are a bit more complex to create and administer (and thus, are somewhat more expensive to maintain on an annual basis) but in the right circumstances can result in big tax savings.
The initial and annual contributions to a defined benefit plan can be much larger than allowed for many defined contribution plans. Presently, the maximum allowable contribution to a 401(k) plan is $54,500 for participants of age 50 or older. But contributions to a defined benefit plan can be large enough to provide a pension benefit of up to $195,000 in annual retirement income. Generally speaking, for taxpayers presently age 50 or older, the tax deductible contribution to a defined benefit plan can range up to as much as several hundred thousand dollars annually. This is so due to the limited remaining period of years until the retirement date and the need for the plan to accumulate sufficient dollars to grow to a level adequate to provide the required benefit.
And if a highly profitable business has few or maybe even no employees, the mature owner may be surprised to find out how much tax benefit is immediately available.
One caveat: Plans of this nature must be installed before year end, so sharpen your pencil now. Less than 60 days to go before New Year’s Eve!