Most people who are self-employed think of a SEP IRA as the natural tool for retirement and tax mitigation; however, once you reach a certain income threshold, the SEP IRA doesn’t quite cut it.
plan is a type of DB plan for small business owners who have a business with 1-10 employees and are willing to make contributions for their employees for three years or more.It is important to understand how a DB plan compares with other types of retirement plans. You’re likely familiar with traditional retirement plans for small businesses like IRA, SEP, SIMPLE or 401. These are allbecause the IRS defines what the contribution limits are based on earned compensation.
Generally speaking, those of us who have defined contribution plans like a 401 or SEP IRA can typically contribute X dollars or X% of earned income to the plan each year. For instance, in 2019 you can contribute up to $19,000 in a 401. With a DB plan, the highest contribution that you can make will be calculated for you based on three key variables: Someone older can generally contribute more, but there’s a compound interest benefit for those who start contributing at a younger age. Whether you’re a sole proprietor, LLC, or corporation, you may qualify for a large tax deduction from your business income — $100,000 or more each year.
The IRS defines what the benefit limits are for a DB plan. Current regulation defines the maximum annual benefit at $225,000 . Plus, a DB plan offers the highest available contributions and tax deductions of any qualified retirement plan. Think of this plan as a wealth-building and tax savings strategy for self-employed professionals and small businesses.If you think this plan makes sense for you, talk to your financial advisor or your CPA.
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