[Blog] Control Your Savings. Command Your Future.

Jun 06, 2023

Six features of a Defined Benefit Plan to maximize your finances for retirement.

If you’re a high-income earner, you might feel like your retirement planning is a puppet show, but you're not the one pulling the strings.

The unpredictable nature of the market and the intricate tax regulations seem to be orchestrating your every move.

The good news is you can take back control of your financial future, and accelerate your savings, with a Defined Benefit Plan.

A Defined Benefit Plan is a retirement plan sanctioned by the IRS specifically for individuals with high earnings, such as small business owners, consultants, and independent contractors. This plan empowers you to put aside up to $265,000, on a pre-tax basis.

Here are six distinct features of a Defined Benefit Plan that help you regain command over your financial future:

  1. Flexible Contribution: Each investor who chooses to use a Defined Benefit Plan as a retirement accelerator, will choose an amount that fits their unique situation.

A Defined Benefit Plan empowers you to design your own plan structure. This includes establishing a planned range for your annual contribution amount, such as $150,000 to $265,000 per year. It is essential to choose a range that reflects your confidence in meeting foreseeable future earnings.

However, the beauty of this plan lies in its flexibility. You can amend and modify the plan, adjusting the range of contributions as needed. If circumstances change, you have the freedom to stop the plan entirely before the planned retirement date. This is a safety net for unexpected circumstances.

  1. Control over Investment Choices: Similar to an IRA account, a Defined Benefit Plan offers open architecture. That means you have control over how your money is invested. You have access to a diverse range of investment options, including stocks, bonds, and alternatives.

It is crucial, however, to maintain stability in your investments. Since you are building a pension with a desired return rate, typically between 4% and 6%, it is important to avoid significant deviations from that figure. If you lack confidence in establishing a sound investment strategy, you should work with a financial advisor to ensure optimal decision-making.

  1. More Control over Tax Obligations: Contributions to a Defined Benefit Plan offer you greater control over your tax obligations. Although it is advisable to target the planned range of contributions, there may be times when you can contribute outside those ranges. Collaborating with an actuary can help you determine the optimal contribution amount.

Increasing your contributions provides you with larger tax write-offs, leading to a reduced overall tax burden. This enhanced control over your tax obligations translates into significant financial advantages tailored to your specific needs.

  1. Flexible Contribution Timing: One of the remarkable features of a Defined Benefit Plan is the ability to time your contributions according to your cash flow requirements.

A best practice is to make no more than 50% of your contribution during the plan tax year. After the plan year concludes, and the exact contribution amount has been calculated, you have until the tax filing deadline, including extensions, to make the remaining contribution. This extended timeframe provides you with additional flexibility in managing your cash flow.

  1. Combine Defined Benefit and Defined Contribution Plans: To maximize tax deductions and retirement savings, business owners can combine a Defined Benefit Plan with a Defined Contribution Plan, such as a 401(k) plan.

This combination creates greater financial flexibility. During years of lower profitability, you can prioritize funding the Defined Benefit Plan while temporarily forgoing contributions to the Defined Contribution Plan. When profitability returns to higher levels, both plans can be funded, allowing for maximum retirement savings and tax benefits.

  1. Control over Your Retirement Payouts: When you terminate your Defined Benefit Plan, you will receive a lump sum amount. At this point, you have full control over the management of your retirement funds.

You can choose to roll the amount into an IRA account, allowing you to maintain control over your investments or make changes based on your retirement goals. Or you can opt to annuitize the amount, creating a steady stream of income to support you throughout your lifetime.

The choice is entirely yours, providing ultimate control over your financial future.

As you approach the end of your plan, the decision on how to handle your lump sum amount further emphasizes the control you have over your financial future. Whether you choose to roll the funds into an IRA account to maintain investment control or annuitize the amount to secure a stream of income for life, the choice lies in your hands.

There’s no greater feeling that taking back control of your finances for a prosperous and worry-free retirement. That’s what a Defined Benefit Plan provides you.