Defined Benefit Plan Calculator: Funding in a Few Seconds!

The personal defined benefit plan calculator below will give you an estimate of how much you can contribute. Just use the toggle below and you will get a “base” contribution and a “max” contribution. Below the calculator we discuss a few caveats and define what the different contribution levels mean.

Defined Benefit Plan Calculator

How much can you contribute?

A Few Comments About the Calculator

  • The defined benefit plan calculator is meant for illustrative purposes only. It is not meant to be exact and final contributions can only be accurately calculated by our actuary.
  • The calculator is only meant to give you a range for year one. After year one, there are many factors that will impact funding.
  • The calculation is only for a solo or owner-only plan. If you have employees, you will want to have us run a custom illustration.
  • You can add a 401(k) plan to a defined benefit plan. You may do the employee deferral with no restriction. However, the profit sharing contribution is limited to 6% of your W2 wage (if an S-Corp or C-Corp) or “deemed” wage if you are a partnership or sole proprietor.
  • The calculator assumes that your company has been in business for at least three years. However, if you have been in business for a shorter period, you must have maximum compensation. If your compensation is lower than the IRS maximum, your contribution will be reduced accordingly.
  • If you have been in business for several years, you can possibly get your contribution higher using a prior or past service adjustment. If you are looking for a larger contribution please reach out to us.

The calculator will give you a good idea of contribution levels. Many business owners just want to get an idea of how much they can contribute without going through a formal process. In fact, most CPAs and financial advisors don’t understand how the plans work. This calculator is a great place to start.

Defined Benefit Plan Basics

Let’s discuss some of the plan basics. There are some critical issues that should be understood upfront. These plans can certainly be more complex than a standard 401(k) plan. But the benefits can not be understated.

The defined benefit plan is a type of pension plan and is different than your basic 401k plan. Let’s take a look at some key points:

  • They can be used for a company of any size including personal solo plans (S-Corps, C-Corps, partnerships, and solo proprietorships).
  • If a company has employees then we can run a couple scenarios and provide separate illustrations. However, our goal is always to get at least 90% of all retirement benefits accrued to the owners.
  • If you are an S-Corp or C-Corp, your W-2 wage amount will largely determine your contribution level. If you are a sole proprietor then your deemed wage needs to be calculated.
  • Since they require an annual actuary certification, they can me more expensive to set up.
  • Plan monitoring is provided by a third-party administrator who will work with the actuary and maintain compliance with the IRS.
  • An actuarial valuation must be done each year. If a funding shortfall is found, additional funding may be required.
  • Requires an in-depth Form 5500 to be filed with the IRS and DOL each year as long as the plan is in place.
  • Tremendous tax savings for owners who would otherwise not qualify for a QBI tax deduction due to income restrictions
  • Can be combined with other plans, such as IRA or 401(k)
  • As a general rule, if a company hires employees, they must offer the same plan to the individuals (subject to discrimination testing). It is funded entirely without employee contributions even if it is a personal defined benefit plan.

Personal Defined Benefit Plan Calculator

For example, a participant who will be in the plan for ten years at retirement might accrue one-tenth of his benefit for each year of plan participation. Assuming a projected pension of $100 per month, this participant would have an accrued benefit of $10 per month after the first year, $20 per month after the second year and so forth. Vesting is then applied to the accrued benefit. These amounts are not considered in our calculator or illustrator, but can be included in the actuary calculation.

When a participant terminates, his pension benefit calculation is defined as a certain amount payable at retirement age as a personal annuity. An actuary determines the present lump sum value of that annuity. If the current value is less than $5,000, the participant may generally take the distribution in cash. This is either as a rollover or a taxable distribution. If the value is more than $5,000, the default form of distribution is a joint and survivor annuity.

personal defined benefit plan calculator

Defined benefit pension plans can offer loans to participants. The maximum available loan is a calculation based on the lump sum value of the vested accrued benefits of the participants (as opposed to the account balance calculator). In-service withdrawals and hardship withdrawals are generally not allowed. The personal defined benefit plan calculator will not track loans.

Base CalculationMax Calculation
Assumes Straight-Line ContributionsFront Loaded Contributions
Conservative Year One FundingGreat for High Year One Income
Base Year Interest RateLower Discount Rate
Combined with 401(k) for Higher FundingCan Result in Overfunding

Bottom Line

The good news is that defined benefit plans will allow for much higher contributions compared to 401(k) plans. This higher amount will grow as employees age and have pay increases. This allows participants to accumulate large tax-deferred amounts.

Defined benefit plans allow high income earners to maximize contributions and accumulate significant retirement funds. In addition, they are afforded some very large tax deductions.

But don’t take it solely from us. Take a look at the defined benefit plan calculator and see for yourself the large contributions available to you. When combined with a 401k (including a profit sharing component) it is tough to beat these plans.

So hopefully by now you have a custom defined benefit plan illustration. But how much do you really know about these plans? What are the pros and cons and how do the plans actually work? Well, let’s take a step back and identify some key issues relating to the plans.