Stephen M. Kyne, partner, Sterling Manor
Financial LLC, Saratoga Springs.
BY STEPHEN M. KYNE
Are you a small business owner who wishes
you could save more for retirement, and
get a bigger tax deduction than the $53,000
currently allowed in your Defined Contribution
(e.g. 401(k) with profit sharing) Plan? If
so, then you will be happy to know that there
are other options that could allow you to
make more than $200,000 in tax-deductible
retirement contributions each year.
Now that the economy has largely recovered
from the recession, many business owners
are finding themselves in an interesting
predicament:
1. They’re six years closer to retirement,
and they’re afraid of another recession wiping
their savings away.
2. Their businesses are running full-steam,
and they are finding themselves looking high
and low for tax deductions each year.
3. They want to guarantee a pension for
themselves in retirement to maintain their
standard of living.
For years, the go-to option for retirement
saving has been the 401(k), and its similar
counterparts, called Defined Contribution
plans. But, for business owners who need to
save more, or who want to generate larger
tax deductions, the preferred option is the
Defined Benefit plan. Defined Benefit plans
haven’t gotten much traction in recent years
simply because many business owners didn’t
have the income to shield from taxes.
Today, business is back, and so is the Defined
Benefit plan.
What is a Defined Benefit plan? In layterms,
it’s a pension. A Defined Benefit plan
allows you to determine how much income
you would like, on a guaranteed basis, in
retirement, and then back into the total funding
level necessary to make that happen. You
literally define your benefit. The higher the
desired benefit, the higher the funding requirement,
and the more in the way of annual
tax-deductible contributions you can make.
Would you like a guaranteed pension of
up to $210,000 in retirement? You can make
an annual tax-deductible contribution of up to
$260,000 to a Defined Benefit plan to make
that happen. Those are the current limits.
Of course, a plan could be structured to
provide less income, or accept lower annual
contributions, and can be tailored to meet
your specific needs and objectives. Don’t
count yourself out just because you don’t
have $260,000 annually to shelter from taxes.
Defined Benefit plans can include different
types of investments depending on your
goals. Your investment mix may depend on
when you want your plan to be fully funded,
or whether you’d like to maximize your deductible
contributions.
If you would like to fully-fund the plan
more quickly, then using investments like
stocks and bonds may be right for you. Since
these types of investments tend to appreciate
more quickly, you may be able to fully-fund
the plan in fewer years, with a lower total
contribution.
If maximizing your total tax deductions is
your goal, then you may want to fully-fund
the plan more slowly. The current low-rate
environment means that certain guaranteed
investments, like fixed annuities, may appreciate
more slowly than stocks and bonds.
That means it will take longer to fund the
plan, allowing you more in total tax-deductible
contributions.
To find out more about defined benefit
plans, and if one might be right for you and
your business, be sure to consult with your
financial advisor and accountant. You have
until the end of the fiscal year to establish
a plan, and until your tax filing deadline,
including extensions, to fund it. These plans
are highly customizable, so don’t miss an
opportunity to provide substantial benefits
for you and your business!
Kyne is a partner at Sterling Manor Financial
LLC in Saratoga Springs and Rhinebeck.