FAQs about Defined Benefit Plans




How do I know if a Defined Benefit Plan is right for me? 

  • The plan is primarily for self-employed individuals or small business owners who are high-income earners. If you would like to significantly increase your tax deductible saving potential, then this plan may be a fit.
  • We recommend you take our quiz to find out if your situation qualifies.

How is the annual contribution amount for a Defined Benefit Plan calculated? 

  • The contribution amount is calculated by an actuary that we will connect you with. There are several variables that factor into the calculation of this amount and many of them can be changed to keep the plan flexible.

Who is involved in setting up and maintaining a Defined Benefit Plan?  

  • Actuary– they run the math. They are called the Third-Party administrator (TPA).
  • Investment Advisor – Edge Financial Advisors, LLC
  • Accountant – Or you, if you do your own taxes.

Explain the process of setting up a Defined Benefit Plan. What is involved? What do you need from me?   

  • Our clients complete a questionnaire we provide to them that has all necessary information to get started. In addition, we need a copy of all W2’s/K1’s for those that are going to be involved in the plan. The TPA can help complete them, and once they are completed, we do the rest of the work.
  • After that, the remaining steps are:
    • Determine if the plan is appropriate and beneficial.
    • Complete paperwork to set up the plan and provide required documents to open the account(s).
    • Decide investment strategy.
    • Deposit and invest.

After my plan is set up, what’s next?    

  • The first step is having the TPA figure out the minimum, target, and maximum amount you can contribute for you situation.
    • Year 1 - Plan is set up and investment account is funded and invested.
    • Year 2 and beyond - Maintain the account. Each year the TPA gives you the figure to fund the plan based upon several factors.

How long will this process take?    

  • The plan can be set up and funded in as little as one week, but may take slightly longer. 

What happens if my financial circumstances change, and I can no longer contribute what I originally planned?    

  • You can change the plan details annually or even terminate the plan. There is a fee (around $2,000) to amend it.  
  • The rule of thumb is to only do this type of plan if you plan to be able to fund it for at least three years or more.

What type of penalties will I incur if I can’t meet my annual contribution?    

  • You have to contribute at least the minimum, and no more than the maximum, or you will face excise tax penalties (10% of the shortfall/excess per year) and possible disqualification of the plan. The contribution amount will be adjusted every year, taking into consideration the value of assets in the plan.
  • These penalties can be avoided if you properly shut down the plan or make an amendment.  We have had clients do this successfully.

When can I first expect to see real results from my participation in the Defined Benefit Plan?    

  • When you file taxes for the first year you contribute! We’ve seen many clients that use this plan receive tens of thousands of dollars back on their tax returns each year. When done over years it saves hundreds of thousands of dollars total. In addition, investment projections will help you understand what this means for your retirement outlook.

Is there a window of time each year, during which I can adjust my contribution to the Defined Benefit Plan?    

  • Yes, there is a minimum and maximum allowed contribution each year. This will be disclosed to you each year before you make your contributions.
  • You have until you file your taxes to fund the plan for the previous year. The latest deadline is September 15th of the following year.

Do I have control over where the investment is directed in my Defined Benefit Plan?   

  • Yes, we will work with you to come up with an investment strategy that suits your needs, and we will only implement it once you agree.

Is there an ideal time to enroll in the Defined Benefit Plan?   

  • You need to have the plan set up before December 31st of the calendar year of which you’d like to start. That said, contributions can be deposited the following year before you file taxes.

How long can I participate in the Defined Benefit Plan?  Is there a maximum number of years? What is the total amount I can contribute?  

  • Per year, you can contribute an unlimited amount, and there is no limit on number of years to contribute.
  • The maximum total benefit on the Defined Benefit Plan is a single sum as high as $3.2 million (2023) that can be paid as early as age 62 or later.
  • The $3.2 million benefit amount adjust higher each year with an inflation calculation.
  • The limit phases in over 10 years and reflects both contributions deposited and investment returns. Because contributions to the Defined Benefit Plan generally are made each year, the shorter the horizon to retirement, the higher the annual contribution can be without exceeding this limit. Conversely, a longer horizon results in a lower annual contribution limit.