Defined Benefit Plan Illustration
Pension Consultants Minneapolis
(Provides the Highest Contribution and Tax Deduction – most effective with owner only companies with no employees)
The contributions for Defined Benefit Plan (s) are calculated based on the owners’ age(s) and compensation (or compensation history). The older the owner and the higher the compensation they have (up to IRS compensation limits), the larger the contribution allowed for the owner. Pension Consultants Minneapolis. Defined Benefit Plans are not subject to the 25% employer deduction or participant contribution limitations.
Defined Benefit Plans (DBP’s) are utilized mainly for owner only companies and sometimes cover the owner’s spouse. The following is only one example of how this type of plan can benefit your company when combined with a 401(k) Profit Sharing plan:
| SUMMARY OF CONTRIBUTIONS – OWNER AND SPOUSE | |||||||
| Employee | Age | Compensation | 401(k) Elective Deferral |
Profit Sharing Contribution |
DBP Annual Contribution |
Total | Contribution as % of Total |
| Owner | 59 | $290,000 | $26,000 | $17,400 | $254,000 | $297,400 | 102.6% |
| Spouse | 55 | 28,500 | 26,000 | 1,710 | 25,000 | 52,710 | 184.9% |
| Total Contribution | $52,000 | $19,110 | $279,000 | $350,110 | |||
| SUMMARY OF TOTAL CONTRIBUTIONS | Total | % of Total |
| Total Contributions for Owners (including deferrals) | $350,110 | 100.0% |
| Total Contributions for Employees | 0 | 0% |
| Total Contributions & Deduction | $350,110 | 100.0% |
| SUMMARY OF TAX SAVINGS & CASH REQUIREMENTS | ||
| Total Contribution for Owner (including deferrals) | $350,110 | |
| Total Contribution & Deduction | $350,110 | |
| Less: Estimated INCOME TAX SAVINGS | – 157,000 | |
| Net Cash Paid Out | $193,110 | – 193,110 |
| Owner’s Contribution Paid by TAX SAVINGS | $ 157,000 | |
| CONCLUSION |
| The Owner and spouse are receiving total contributions of $350,110 by only paying out a net cash amount of $193,110 after current tax savings. |
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Additional assumptions used in above calculations:
- Rate of investment return is 5.5%.
- Total Owner combined Federal & State Income Tax Rate assumed at 45%. You should consult your tax advisor as to the actual tax rates and your actual amount saved.
- Contributions may vary in the future based on actual investment performance, plan, provisions and changes in tax regulations.
- The numbers of participants included in the illustrations were limited for simplicity and comparability. However, all of the plans are able to serve from one to hundreds of participants.