Personal Defined Benefits Plan

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learning_head
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Joined: Sat Apr 10, 2010 6:02 pm

Personal Defined Benefits Plan

Post by learning_head »

Has anyone had any experience with this?

http://www.forbes.com/sites/robertberge ... nalfinance
Finally, for self-employed individuals, a personal defined benefit plan may enable you to save more than $100,000 a year in a tax-deferred account. Defined benefit plans are significantly more complex and expensive than other more common alternatives, such as a solo 401(k) or SEP IRA. The potential tax savings during high income years, however, make this option worth considering.

Unlike 401(k), IRA, and other defined contribution plans, a defined benefit plan starts with setting a projected annual benefit at retirement. Once that benefit is determined, an actuary uses your current age, life expectancy, and return assumptions to calculate the annual contribution needed to achieve the defined benefit. In some cases, the annual contribution can easily exceed $100,000, allowing a small business owner to sock away far more than permitted with other retirement savings options.

As with other retirement options, there are several things to consider. First, defined benefit plans come with setup and administration fees not found with other more traditional retirement options. The annual administration cost can easily exceed $1,000, and there are additional fees if amendments need to be made to the plan. Second, once the plan is put in place, the annual contributions are required. You cannot simply decide not to contribute one year, as you can with 401(k) and IRA accounts. Generally speaking, one should be prepared to contribute to the plan for at least five years. Finally, according to Charles Schwab, these plans are generally best suited for those 50 or older who can make annual contributions of at least $80,000.

For those considering a defined benefit plan, seeking advice from a pension expert is a must.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

I have one

The older you are the better it works.
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White Coat Investor
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Re: Personal Defined Benefits Plan

Post by White Coat Investor »

My group uses one. Schwab offers Solo DBPs for a reasonable price. I think it's a lot better option than cash value life insurance and most of the time, a taxable account.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Average Investor
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Re: Personal Defined Benefits Plan

Post by Average Investor »

I have one for my S Corp.

Its a great setup if you are a consistent year to year high income earner and do not have any or many employees (if you have employees you need to cover them in the plan as well). Annual fees/accounting cost are fairly high for such a plan (mine are about $2000 on average) but it has enabled me to defer a substantial amount each year since I started my plan, saving a *lot* in taxes.

You can have a Defined Benefit plan as well as 401k plan at the same time as well.
Tomorrow never knows.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

Average Investor wrote:I have one for my S Corp.

Its a great setup if you are a consistent year to year high income earner and do not have any or many employees (if you have employees you need to cover them in the plan as well). Annual fees/accounting cost are fairly high for such a plan (mine are about $2000-3000) but it has enabled me to defer $100k or more each year since I started my plan, saving a *lot* in taxes.

You can have a Defined Benefit plan as well as 401k plan at the same time as well.
I have one as I mentioned. Im sure you realize that you have deferred taxes and this may or may not save a lot in taxes. One of the problems with maxing this and a defined contribution plan like a 401k is that you may pull the money out at the same tax rate.

You also can only put 100k or more each year if you are closer to retirement. For instance my range of allowable contributions around age 40 were between 30-80k (min and max). It all depends on how the investments perform. Frankly you hope that the amount you are allowed to contribute goes down.
Average Investor
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Re: Personal Defined Benefits Plan

Post by Average Investor »

dhodson wrote:
I have one as I mentioned. Im sure you realize that you have deferred taxes and this may or may not save a lot in taxes. One of the problems with maxing this and a defined contribution plan like a 401k is that you may pull the money out at the same tax rate.

You also can only put 100k or more each year if you are closer to retirement. For instance my range of allowable contributions around age 40 were between 30-80k (min and max). It all depends on how the investments perform. Frankly you hope that the amount you are allowed to contribute goes down.
Understood and agree - such a plan lets one defer paying taxes otherwise due now until later, which ultimately may not result in tax savings (though I certainly hope so!).

My tax rate now is pretty high, single filer in CA, few other significant deductions. I'm hoping I can do enough Roth conversions once I stop working (possibly as a resident in a no income tax state) to bring down my RMDs.

My allowable contribution amount has not gone down at all, this account is 100% bonds and it has not grown significantly.
Last edited by Average Investor on Thu Feb 27, 2014 1:31 am, edited 2 times in total.
Tomorrow never knows.
SpaceCowboy
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Re: Personal Defined Benefits Plan

Post by SpaceCowboy »

I considered this type of plan for my S-Corp and ended up passing due to the variability of income in our business. Works well if annual earnings are consistent.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

Average Investor wrote:
dhodson wrote:
I have one as I mentioned. Im sure you realize that you have deferred taxes and this may or may not save a lot in taxes. One of the problems with maxing this and a defined contribution plan like a 401k is that you may pull the money out at the same tax rate.

You also can only put 100k or more each year if you are closer to retirement. For instance my range of allowable contributions around age 40 were between 30-80k (min and max). It all depends on how the investments perform. Frankly you hope that the amount you are allowed to contribute goes down.
Understood and agree - such a plan lets one defer paying taxes otherwise due now until later, which ultimately may not result in tax savings (though I certainly hope so!).

My tax rate now is pretty high, single filer in CA, few other significant deductions. I'm hoping I can do enough Roth conversions once I stop working (possibly as a resident in a no income tax state) to bring down my RMDs.

My allowable contribution amount has not gone down at all, this account is 100% bonds and it has not grown significantly.
Why did u go all bonds.
Average Investor
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Re: Personal Defined Benefits Plan

Post by Average Investor »

dhodson wrote:
Why did u go all bonds.
My IPS calls for a 65/35 stock/bond split. My taxable account is 100% stocks so the Defined Benefit and 401k accounts is where the bond allocation would fit.
Tomorrow never knows.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

Average Investor wrote:
dhodson wrote:
Why did u go all bonds.
My IPS calls for a 65/35 stock/bond split. My taxable account is 100% stocks so the Defined Benefit and 401k accounts is where the bond allocation would fit.
That's a good call then.

One thing to also consider is how the db plan affects your allowable contributions to your 401k. If you alternate the min and max contribution to your db plan then on those years where u are contributing the min, you can place more in the 401k. In the long run it will give you more in the 401k and the same defined benefit.
Average Investor
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Re: Personal Defined Benefits Plan

Post by Average Investor »

dhodson wrote:
Average Investor wrote:
dhodson wrote:
Why did u go all bonds.
My IPS calls for a 65/35 stock/bond split. My taxable account is 100% stocks so the Defined Benefit and 401k accounts is where the bond allocation would fit.
That's a good call then.

One thing to also consider is how the db plan affects your allowable contributions to your 401k. If you alternate the min and max contribution to your db plan then on those years where u are contributing the min, you can place more in the 401k. In the long run it will give you more in the 401k and the same defined benefit.
Thanks, I understand that Defined Benefit contributions can limit what one can contribute to a 401k. So far it has made more sense to max out Defined Benefit deferrals to lessen my current tax liability as much as possible. I'm hoping to stop working full time later this year, the Defined Benefit plan will be terminated at that time and I will likely use a 401k solo going forward if I have any income.

Thank you.
Tomorrow never knows.
dhodson
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Joined: Mon May 24, 2010 3:03 pm

Re: Personal Defined Benefits Plan

Post by dhodson »

Average Investor wrote:
dhodson wrote:
Average Investor wrote:
dhodson wrote:
Why did u go all bonds.
My IPS calls for a 65/35 stock/bond split. My taxable account is 100% stocks so the Defined Benefit and 401k accounts is where the bond allocation would fit.
That's a good call then.

One thing to also consider is how the db plan affects your allowable contributions to your 401k. If you alternate the min and max contribution to your db plan then on those years where u are contributing the min, you can place more in the 401k. In the long run it will give you more in the 401k and the same defined benefit.
Thanks, I understand that Defined Benefit contributions can limit what one can contribute to a 401k. So far it has made more sense to max out Defined Benefit deferrals to lessen my current tax liability as much as possible. I'm hoping to stop working full time later this year, the Defined Benefit plan will be terminated at that time and I will likely use a 401k solo going forward if I have any income.

Thank you.
Id be sure it isnt over funded though bc that will cost you.
Average Investor
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Re: Personal Defined Benefits Plan

Post by Average Investor »

dhodson wrote:
Average Investor wrote:
dhodson wrote:
Average Investor wrote:
dhodson wrote:
Why did u go all bonds.
My IPS calls for a 65/35 stock/bond split. My taxable account is 100% stocks so the Defined Benefit and 401k accounts is where the bond allocation would fit.
That's a good call then.

One thing to also consider is how the db plan affects your allowable contributions to your 401k. If you alternate the min and max contribution to your db plan then on those years where u are contributing the min, you can place more in the 401k. In the long run it will give you more in the 401k and the same defined benefit.
Thanks, I understand that Defined Benefit contributions can limit what one can contribute to a 401k. So far it has made more sense to max out Defined Benefit deferrals to lessen my current tax liability as much as possible. I'm hoping to stop working full time later this year, the Defined Benefit plan will be terminated at that time and I will likely use a 401k solo going forward if I have any income.

Thank you.
Id be sure it isnt over funded though bc that will cost you.
Thanks for the heads up. I will check with the firm that oversees the plan. My recollection is that we were slightly underfunded as of 2012.

Appreciate the help.
Tomorrow never knows.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

I doubt that would be a prb then if you were under funded and you are all bonds.
penumbra
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Re: Personal Defined Benefits Plan

Post by penumbra »

We used this in my former medical group. As mentioned, it works best the older you are, since you have fewer years to fund. We established the plan and the older guys (50's and later) got to fund as much as $260k/year. When fully funded for the older participants, , the plan was terminated and rolled over into a 401k. It's very slick, and allows for maximum funding. We had simultaneous 401k, as well. My understanding is that this can be repeated later on. Those who had partially funded their maximum previously have limitations going forward, but new and younger individuals have no such limitations.
dhodson
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Re: Personal Defined Benefits Plan

Post by dhodson »

penumbra wrote:We used this in my former medical group. As mentioned, it works best the older you are, since you have fewer years to fund. We established the plan and the older guys (50's and later) got to fund as much as $260k/year. When fully funded for the older participants, , the plan was terminated and rolled over into a 401k. It's very slick, and allows for maximum funding. We had simultaneous 401k, as well. My understanding is that this can be repeated later on. Those who had partially funded their maximum previously have limitations going forward, but new and younger individuals have no such limitations.
Depends on what you mean by repeated.
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