401(k), Roth IRA, pension plans – if your focus is saving for retirement, these are usually the solutions you’re told to reach for.
Sometimes, this comes at the expense of what would be the best plan for your situation.
Just like in business, if you’re doing what everyone else is doing, you’re probably not being as effective as you could be.
Off-the-shelf solutions might be too vanilla for your specific circumstances or career, and choosing them could cost you the opportunity to grow your assets.
Take, for example, the defined benefit plan.
Not a common choice, it’s true, and yet they can be extremely beneficial if you’re an entrepreneur looking to grow your wealth.
But what if you’re not an entrepreneur? When should you strike out on your own path when it comes to your company’s retirement plan?
Here’s how defined benefit plans work and when you should consider them.
The Retirement Plan Landscape Among Businesses
Most business owners are familiar with qualified retirement plans.
These are employer-sponsored retirement plans that meet the requirements of the Internal Revenue Code and the Employee Retirement Income Security Act, which make them eligible for certain tax benefits like tax deductions and tax deferrals of investment gains.
The popular plans mentioned above, like 401(k)s, fit the bill and are a common choice for employers and employees alike.
These plans often include employer matching of employee contributions, so that each dollar an employee saves is matched by the employer up to a certain limit.
Employees then choose mutual funds or stocks offered by the plan as places to invest their money. The goal is to grow this money over a long period. Slow and steady. Employers often join their employees in using these plans.
And that could be a big mistake.
The Power of Defined Benefit Plans for Owners
For those that want to grow serious wealth, however, there are other options. Enter the defined benefit plan.
Defined benefit plans promise a percentage of compensation to be received at retirement. That means you (the business owner) will get a fixed percentage of your salary. As that salary grows, these plans become
more attractive.
When properly set up, these plans offer attractive advantages to successful business owners whose businesses are generating ample cash flow. These include:
- Ability to make larger contributions than are possible via other qualified retirement plan options
- Ability to maximize tax deductions
- Tax-deferred growth
- Ability to receive a substantial share of the money contributed and the returns generated (while still rewarding employees)
- Predictability of benefits in retirement
Despite all these advantages, defined benefit plans aren’t commonly used perhaps because many business owners aren’t aware of their potential.
Conclusion
Defined benefit plans are often overlooked, but they shouldn’t be. While they’re less common than other retirement plans, they offer real wealth-building potential that other plans don’t.
Given how complex it is, it can help to have someone knowledgeable to advise you on the best path forward.
As experienced financial professionals, we at Confidence Wealth Management help clients like you figure out the best retirement plan for their situation, so that when they’re ready, they can retire gracefully with peace of mind.
It takes expertise born of experience, however, to know when what option is the right one. Our team specializes in designing custom-made plans and implementing retirement plan services that move you toward your goals and the best results for the company, the plan, and the participants.
If you do already have a plan, make sure your administrator is watching out for the most common mistakes that may trigger an audit.
Please connect with us and let us help you plan for your dream retirement. We would be delighted to go on the journey with you.
