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Defining a Defined Benefits Plan - And Why You Should Have One

by Wes Read, CPA, CFP® | June 16, 2022

We’re often asked what are the best ways to save on taxes and build wealth.  Without a doubt, funding a retirement plan is one of them.  And for certain doctors, a specific type of retirement plan is a silver bullet. It’s called a Defined Benefit plan, aka “DB Plan” or “Cash Balance Plan.” Here’s answers to critical questions related to a Defined Benefit plan.

  • What is a Defined Benefit Plan? It’s a type of business retirement plan, like a 401K or SEP IRA.
  • What is the difference between a Defined Benefit plan and a 401K? A 401K plan defines the limit participants can fund into the plan each year. A Defined Benefit plan defines the benefit a participant can be paid out when they retire. Traditionally they’ve been called a “pension”.
  • How much can I contribute into a Defined Benefit Plan? Contribution limits are a function of your income and your age. An actuary is required in order to project investment growth, inflation, and other factors necessary to determine the amount you can contribute today in order to meet a defined payout in the future. The max contribution could be very high, exceeding $200,000 per year.
  • Can I have both a 401K and Defined Benefit plan? Yes. This is called a combo plan and is extremely effective.
  • Are the contributions fully tax deductible? Yes. 100%. And the deduction is significant because (1) it removes income taxed at your highest tax brackets and (2) it may allow you to get other tax benefits that you would have phased out of without it, such as the child tax credit. If you’re in California, it also lowers your annual franchise tax.
  • Will I have to contribute to my team members? Yes. But it may not be a lot.
  • When does a Define Benefit Plan make sense? A Defined Benefit Plan generally makes sense if (1) you are older than most of your team members or have very few team members, (2) have high surplus cash flow, and (3) will be able to fund the plan for at least three years.
  • Will a Defined Benefit Plan accelerate my financial independence? Big time.
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