The Depression of the 1930s lead to the creation of new pension plans and revision of existing railroad pension plans under 26USC 414. Most investors know that Public Sector and several Private Sector employees will receive pensions when they retire. Frequently those pensions are at a pre-determined or “Defined” amount as a percentage of income.
The laws also provide for small businesses of four or less employees and Individuals with Self-Employment Income to set up their own actuarial approved Defined Benefit plans which can be funded by up to a $210,000 per person annually in a tax deferred account. These plans can be in addition to 401(K) plans an individual has with an employer.
A defined benefit plan promises a specific benefit in retirement. To arrive at the benefit, business owners decide what percent of their annual income they want to have at retirement or what percent of current income they can comfortably afford to contribute to the plan, up to the maximum allowable amount. For 2014 and 2015 that amount is $210,000.00.
An annual contribution amount is required by the business owner to accumulate sufficient savings to pay out the benefit. The actual amount is determined by actuaries using formulas based on: Current Age, Compensation, Years of employment, Planned retirement age, and other factors.
Assets may be invested in mutual funds, bonds, equities or other marketable securities. Typically investments with lower volatility are generally recommended.
This article is for informational purposes only and is not meant to be a complete discussion of all benefits, risks, limitations, and costs. Consult the appropriate professional for financial, tax and legal advice prior to making any financial decision.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com
He has previously owned two industrial supply businesses, was a partner in five Copeland’s Restaurant Franchises, and owned a Dun & Bradstreet Receivables Franchise for six Western States.
He served as Mayor of Atherton, CA during 2005-2006.