Traditional defined benefit plans
A traditional defined benefit plan is the most efficient for providing retirement benefits - because that's where it focuses the money. Benefits are usually expressed as a monthly payment based on service, pay and retirement age.
Each dollar you put into a defined benefit plan produces much higher benefits for employees who stay until retirement - and much lower benefits for employees who leave early - than the same dollar put into a typical defined contribution plan.
Tax deductions for defined benefit plans can be very large; they are not subject to the $45,000 or 100% DC plan limit. They reach a peak when the plan is set up about 10 years before retirement. Here's an example of a plan that pays the IRS maximum benefits; the benefit level can be adjusted to fit your retirement income and tax deduction objectives.
See plan description above Introduction to defined benefit plans
|
|
Age |
Years of Service |
Salary |
Projected annual retirement benefit |
First Year Contributions |
| Minimum Contribution |
Maximum Deduction |
| Owner |
55 |
20 |
$100,000 |
$142,400 |
$71,800 |
$110,100 |
| Employee |
40 |
10 |
50,000 |
128,200 |
18,800 |
25,500 |
| Employee |
30 |
5 |
30,000 |
113,900 |
7,200 |
8,600 |
|
Total |
|
|
$180,000 |
|
$97,800 |
$144,200 |
An "integrated" plan effective 01/01/2004 providing for maximum IRS benefits.
Assumptions: Expected retirement age of 65, investment returns of 6%, 4% annual pay increases, and entry age actuarial cost method.
Future Contributions: If you contribute more than the minimum in the first year, the excess will become a credit. This can be applied to the minimum contribution for the next year.
For example, in year one, taking a maximum deduction of $144,200 generates a $46,400 credit ($144,200-$97,800). Apply this credit to reduce the minimum contribution needed for next year, yielding a new minimum contribution of $51,400.
Defined Benefit plan
