Planning for the Older Business Owner

You have expressed an interest in setting up a qualified retirement plan to help you build up your retirement nest-egg as quickly as possible. There are many different kinds of retirement plans, but in your situation, with retirement close enough to have you worried, a so-called defined benefit pension plan almost certainly would work best.

The reason for this is that a defined benefit plan doesn't put rigid dollar limits on the amount you can contribute and deduct in any single year. Instead, it sets a cap on the amount of benefit you can fund, usually based on your salary level and years in the business. The amount of contributions is based on actuarial factors including your age and the assumed rate at which your contributions will grow.

High-income individuals can use a defined benefit plan to fund an annual pension of as much as $120,000 a year starting at age 65, in as little as ten years! You couldn't come close to that amount using a profit-sharing plan. Maximum benefits are lower if you retire early, or aren't a plan participant for at least ten years when you retire.

Defined benefit plans are more complicated to set up than most other types of qualified retirement plans, and they're also more expensive to administer. But for an older high-income businessperson the tax and financial benefits are almost always worth it.

As with other kinds of qualified retirement plans, you generally have to include other employees of the business in a defined benefit pension plan. However, the plan can have minimum age and service requirements, so that new and younger employees do not have to receive contributions. And contributions for younger employees who are in the plan will be significantly less than your own contributions will be. Benefits under the plan do not have to vest immediately, either, so employees who only stay for a short time can't take their benefits with them when they leave. Your plan also can be integrated with social security, so that a greater percentage of plan benefits go employees above the wage base.

If you think that a defined benefit plan will work for you, or you would like to know more about this or other qualified plan options, please contact us for assistance.