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What Are the Advantages of a Defined Benefit Plan?

September 4, 2020 by BPM Team

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If you are self-employed or own a business, you have the opportunity to prepare for the future by using an employer sponsored-based retirement plan. This is a great way to save for your retirement, but it can also be an effective way to reduce your current tax liabilities.

Using an employer-sponsored plan to prepare for your retirement has lots of advantages, providing you choose the right type of program. However, with plenty of options to choose from, it’s important to get professional advice if you’re unsure which type of retirement plan is best for you.

A defined benefit plan is an extremely popular work-based retirement scheme, especially amongst entrepreneurs, self-employed workers and business owners. If you’re looking for ways to reduce your company’s tax liability or save for your retirement, read on to find out more about the advantages of a defined benefit plan.

What is a Defined Benefit Plan?

A defined benefit plan is an employer-sponsored retirement plan that can be used for all eligible employees. As the owner of your firm, you’re eligible to contribute to a defined benefit plan to fund your own benefit. This free defined benefit plan calculator shows how you can contribute per year. The benefits received by plan participants are usually based on various factors, such as their length of service and their salary.

The contributions collected every month or year are invested, ideally to increase the capital. Although the company is responsible for making investment-related decisions, many business owners and entrepreneurs appoint an investment manager to handle this aspect of the plan.

However, the benefits employees receive under a defined benefit plan are not dependent on the performance of the investment. Instead, a defined benefit plan ensures employees will receive a set amount upon a specific date (their retirement), regardless of how well the investment performs.

As a company, you’ll be responsible for making up the shortfall if the investments made with the defined benefit plan contributions do not perform well. Conversely, profits made via investments which exceed the amount that needs to be paid out can reduce future contributions.

What Are the Advantages of a Defined Benefit Plan?

There are plenty of advantages associated with defined benefit plans, including:

1. Guaranteed Benefits

Unlike most other retirement schemes, a defined benefit plan allows you to determine exactly how much you’ll receive at retirement. As the payouts you receive aren’t based on how well the interim investment performs, you can use a to determine how much you’ll receive in the future.

2. Reduce Your Tax Liability

Introducing a defined benefit plan to your business can significantly reduce your tax liabilities. By making relatively large contributions to the plan at the right times, you can minimize the amount owed to the IRS and invest in your future instead.

Both businesses and individuals pay a considerable amount of tax over their lifetimes. Making savvy investments at the right time is an efficient way to reduce your tax liability, without attracting scrutiny. A proactive approach to financial management gives you the chance to alter your tax liabilities and can have a major impact on your personal finances now and in the future.

3. Spouses Can be Employees

If you’re running an enterprise and need additional support, why not turn it into a family business? If your spouse is also an employee of the business, you can effectively double your contributions to the defined benefit plan. This reduces your current tax liability further and enables you to maximize the amount of financial preparation you’re doing for your retirement.

Although a spouse’s contributions will be dependent on their job title, this doesn’t prevent you from making significant contributions on their behalf. Due to this, many self-employed business owners choose to give their spouses an established role in their company.

4. You Can Add a 401(k)

If you choose to, you can add a 401(k) retirement savings plan to your financial portfolio. When you incorporate a 401(k) plan in addition to a defined benefit plan, you can typically contribute an extra $26,000 per person, providing you are aged 50 or above. Additionally, profit sharing allocations are allowable under the rules of a 401(k) plan, which may be something you want to pursue. 


How to Save for Retirement


Choosing a Retirement Plan

While there are many advantages linked to defined benefit plans, it’s important to consider all your options before deciding what type of retirement plan is right for you. Retirement is a big step in both your life and career, so ensuring you do everything carefully is paramount. By seeking expert advice, you can determine which type of retirement plan will benefit your business now and your retirement in the future.

Image Source: Pexels.com

Filed Under: Finance, Mindset Tagged With: Investments, retirement, Retirement planning

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