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 calculation. Below the calculator we discuss a few caveats and define what the different contribution levels mean.
Personal Defined Benefit Plan Calculator
How much can you contribute?
Table of contents
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.
|Basic Plan Assumptions||Max Plan Assumptions|
|Straight-Line Funding||Allows Front Loading in Year One|
|Solo or Owner Only Plan||Possible Overfunding|
|5% Interest Crediting Rate||Takes Advantage of Time Value of Money|
|Can Combine with 401(k) Plan||Excellent For Year One Max|
Defined Benefit Plan Calculation Basics
Let’s discuss some of the plan basics. There are some critical calculation 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.
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 Calculation||Max Calculation|
|Assumes Straight-Line Contributions||Front Loaded Contributions|
|Conservative Year One Funding||Great for High Year One Income|
|Base Year Interest Rate||Lower Discount Rate|
|Combined with 401(k) for Higher Funding||Can Result in Overfunding|
Other Calculator Considerations
The calculator is only relevant for year one. Going forward, you will receive a flexible funding range that includes minimum and maximum contributions. But you generally want to stay close to the target contribution level. This will tend to be closer to the minimum amount because the IRS allows you to crew up to 150% of the accrued benefit in a given year. This will lend itself to higher funding levels.
For some people who have complicated situations, it may be best to get a custom illustration prepared. This can give you a better idea of a funding level if you have control group issues or other complexities.
Don’t forget that combining a plan with the 401(k) can increase your funding levels and provide additional flexibility. This is because 401(k) plans are optional or elective. Since you’re not required to contribute to the plan, you can make larger contributions in years when additional funding is needed. But you can also choose not to fund in a given year to keep your cash balance plan funding in line.
You might find that the calculator generates contribution levels that are much higher than you would like. The good news is that you can lower that amount or do a fixed amount in year one. The initial year of service will increase your funding range in future years and provide you with more upside.
Defined benefit plan calculation
But if you are looking for contributions in the $20,000-$50,000 range, you might want to stick with a 401(k) plan. That way, you can add a defined benefit plan or Kuyt or cash balance plan in future years, and you won’t run into non-compliance. Remember that these plans do not combine well with Szeps or simple plans. So stay away from these plans if you’re considering funding a defined benefit plan at some point in the future.
Define benefit plans that are typically best suited for professional, service companies, or businesses with very few employees. With a large employee base, you are required to give a meaningful benefit to eligible employees, reducing the plan’s overall economics.
How to calculate defined benefit plan contribution
Here are the five steps involved in calculating contribution levels:
- Enter Age
✅You are probably aware that these plans are age weighted. So the older you are the more you can contribute. It is possible to front load a plan so a younger person can make a large year one contribution. This allows a person to take advantage of the time value of money.
However, you typically don’t have to increase your minimum wage if you are over 50 and simply want to contribute around $100,000 a year. But you are legally required to pay yourself a reasonable salary under the S corporation rules. Make sure you review and discuss it with your tax advisor.
If you have a spouse that works for your company, this will give you additional flexibility. In fact, you might find that you can double the contributions calculated in the plan to include a spouse. Spouses fall under the owner-only or solo plan rules. Therefore, they don’t need to pass any detailed discrimination testing. This allows for the highest contribution levels possible.
- Review Contribution Levels With CPA
Not only do cash balance plans offer exceptional retirement savings, but they also provide significant tax benefits. This is true for the contribution amounts and the earnings on those contributions. Ensure you review with a tax professional.
Each client’s situation is different. But the goal is to ensure you craft a retirement plan design that suits your needs.
Also, you might need to adjust your W-2 wage a bit higher to allow for a maximum contribution. The maximum compensation that can be utilized is $305,000. While you may qualify for a maximum contribution with a lower W-2, you might realize the lower W-2 amount will suppress future contribution levels. The result is a lower funding range.
Please also remember that Social Security will cap around $150,000. So any W-2 compensation above this will only cost you Medicare taxes. But the higher W-2 will significantly increase future contributions.
- Compare Base Contribution to Max Contribution
A max funding plan can be great if you’re looking for significant contributions in year one. This is an excellent option for companies with a high income in a given year but is expected to decrease in subsequent years. However, a basic plan would work best for a physician or professional services firm with a high, consistent income. But there is no expectation that that income will be volatile in future years.
Take a careful look at which option is best for you. But you can’t go back once you frontload a plan under a max contribution scenario. Every dollar funded today is one less dollar you can find in the future.
Even though you may get a large amount of money into a plan at a young age, it might not be the best scenario if you expect to be in a higher tax bracket in future years.
The nice part is that you do have flexibility upfront. You also are not stuck with a maximum plan; you could frontload for prior service just a smaller amount, giving you additional funding flexibility in future years.
- Consider Employee Funding Levels
Finding quality employees can be tough. Most companies want to maximize owner or partner contributions. But some want to improve employee retention and morale. Improving the business retirement plan can be a great option.
The calculator is only for a personal defined benefit plan and will not work if you have employees other than the owner. Remember that these plans have strict IRS discrimination rules. You may be able to limit certain employees based on hours worked, date of hire, or even age. But they still must be considered in the overall analysis.
You might need to make a more considerable than anticipated contribution for employees. However, this night might not be as bad as you think. The reason is that you could structure these plans with three-year vesting. So, even though they will receive a contribution, they won’t earn it until after they’ve worked for three years. If they work less than three hours for years, it will be forfeited and rolled back into the plan to offset future contributions.
- Review Compliance
If you have a cash balance plan, you must satisfy the plan’s minimum funding requirements each year. But determining the funding amount can be complicated and requires the help of an actuary. Then the contribution needs to be made by the cash balance plan funding deadline.
When you set your plan up with an administrator or TPA, they typically use an IRS-approved plan. Therefore, the IRS has always already signed off on the verbiage included in the plan. But this does not guarantee an operational structure that works for planning purposes.
Make sure you rely on your third-party administrator. They can also give you plenty of guidance to help you decide what structure is best for you. The administrator can also run custom illustrations for you. That would be beyond the scope of a basic calculator. As you know, a calculator is great for giving you some general guidance, but it may not meet your specific situation.
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.