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Kim Butler

Partners for Prosperity, Inc.

City:Mt. Enterprise

State: TX

I have 20+ years of handling alternative investments in cash, growth and income for clients nationwide.  I strive to help my clients with all things financial in every way possible over the phone and the web.  I own an alpaca farm which I enjoy working during my downtime.  I also enjoy gardening, writing and reading books.  I also train other advisors on Prosperity Economics.

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Small Business People Can Benefit from Pension Plan Rules

Larger contributions possible with defined benefit plans

Private retirement plans can be separated into two categories.  401(k) plans are known as defined contribution plans.  A 401(k) is funded by employee contributions which can be matched by employers.  This type of plan accounts for 93 percent of private plans and “by almost any measure, have taken on a primary role in how workers save for retirement,” said a GAO report delivered to the House Ways and Means Committee in March.

A second type of private retirement plan is a pension plan known as a defined benefit plan.  These are attractive to those who own their own businesses because IRS rules allow larger contributions to these plans than they do to 401(k) plans.  Certain owner-manager businesses such as doctors, dentists, lawyers and other small business professionals have taken advantage of these plans enabling them to put as much tax-deferred income aside for retirement as possible.

Defined benefit plans allow the principal owners of a small firm to contribute relatively high amounts to the plan in lieu of a salary increase, the GAO commented.  “The tax advantages for contributions to a tax-qualified plan compared to taxable compensation can be large because contributions and investment growth are tax-deferred, and hence the earnings compound tax-free, although benefits paid in retirement are taxed.”

The IRS limits contributions to 401(k)s to $16,500 per employee in 2011.  Workers aged 50 and older can make an additional $5,000 catch-up contribution.  The combined employer and employee contribution is capped at $49,000.

Contributions for defined benefit plans cannot exceed the lesser of $195,000 or 100 percent of the participant’s average compensation for his or her highest three consecutive years.  Employees may be allowed to make additional non-deductible contributions, which can grow tax free.