Defined Benefit Plan for the Self Employed: How to ‘Legally’ Structure

There are several benefits of a defined benefit plan for the self-employed. Benefits are guaranteed, contributions are fixed and employer responsibilities are clearly defined. It can be an effective tool for recruiting and retaining key employees.

It requires a steady cash flow to support high contributions and administrative expenses, such as consulting fees. But it isn’t for everyone. Read on to learn how defined benefit plans work and why self-employed should consider one.

One of the benefits of a defined benefit plan for the self-employed is its ability to allow you to make large deductible contributions. Whether you choose to front-load your contribution stream depends on your income and business. If you have a strong year, you may opt for a higher contribution amount than you expected to earn.

Can a self-employed person have a defined benefit plan?

You can also front-load your contribution stream to match tax deductions with your expected income. You can also vary your contributions based on your business income to minimize taxable income.

Another benefit of a defined benefit plan for the self-employed is its ability to provide substantial tax savings. Because payroll taxes are based on wages paid, a higher amount of money can go into the plan. Because of these advantages, a defined benefit plan may be a worthwhile investment for a business owner.

Another benefit is that contributions to a defined benefit plan can be tax-deductible as business expenses. Combined with other retirement options, a defined benefit plan can provide a higher annual retirement income while reducing the risk of lawsuits.

A defined benefit plan for the self-employed is a great way to maximize your retirement savings. Unlike a traditional retirement plan, a defined benefit plan can be more complicated to set up and administer.

But if you make a lot of money, a defined benefit plan may be the best option for you. It has the benefit of allowing you to catch up on your retirement savings. When you start to plan for your future, the benefits can be great.

Defined benefit plan providers

A defined benefit plan for the self-employed is an excellent way to provide your employees with a solid retirement income. Self-employed physicians typically set up defined benefit plans to protect their incomes.

In most cases, the monthly benefit is fixed, but most of these plans do not include cost-of-living adjustments. Therefore, it is important to understand the details of the plan before signing up for a defined benefit plan for the self-employed.

Final thoughts

Unlike a pension plan, defined benefit plans do not fail and cannot retroactively decrease benefit amounts. In fact, one type of defined benefit plan pays a monthly income equal to 25% of the average compensation of the individual.

For example, an employee earning $60,000 a year would receive $15,000 in annual benefits. Monthly benefits would equal $1,250. The benefits begin when the employee reaches a specific age or dies.

Paul Sundin

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