Outside of governments and many traditional “industrial type” companies, pension plans are a thing of the past. In fact, even at most industrial companies, they no longer do traditional pension plans and only honor the historical (typically pre-2000) plan participants. Companies these days stress the benefits of defined contribution plans or 401k(s) instead. Why is this?
Well a defined benefit plan is great for the employee…not very great for the employer. It’s a lot cheaper to give 2-3% of your salary as a matching contribution to a 401(k) than to guarantee 80% of your ending salary at retirement for the rest of your life. This change is good for them, not so good for the working man.
Let’s say, however, that you own your business that is doing extremely well and you are paying way too much in taxes. You have some employees and you are a good boss and provide a 401(k). The amount you can defer as the owner from an income perspective is still not that great, is it? Typically $18-24K. Well designed plans could get you up to $53K, but that is the max.
Most people don’t know that there are better options out there. And the truth is for BUSINESS OWNERS, there is a really good option. Create your own traditional defined benefit pension plan. Yes, you can create your own, and the best part is that you can typically save up to around $2.5M in it. If you have built your business over the last couple of decades and are in your late 40s/ upper 50s this means you can save up to $250K per year over 10 years into the plan. The actual number varies based on actuarial tables but the bottom line is you can shield hundreds of thousands per year, and millions in total, from income taxes.
Additionally, you can set this up with a 401(k) profit sharing plan and create a ton of flexibility for yourself and your staff. The staff also benefits as you are required to set up a plan for them as well but the contributions you make for your staff are nowhere close to the tax savings. Plus, you were likely already contributing for them already.
In summary, under the right circumstances these plans result in hundreds of thousands of dollars saved over a lifetime and can provide some real financial security for yourself and your team.
Give us a call if you’d like to discuss further.
All the best,
Your Fortis Capital Management Team