Defined benefit retirement plans enable successful business owners to significantly increase their retirement savings, while lowering their current income tax liability. Defined benefit plans allow for substantially higher annual contributions for business owners, as compared to other types of retirement plans.
Traditional Defined Benefit Plans
In a traditional defined benefit (or “DB”) plan, the plan defines the benefit that will be paid at retirement age (or earlier separation from employment). An actuary determines the annual amount that must be deposited into the DB plan on an annual basis to provide the benefit called for under the terms of the plan. In addition to the benefits to be paid, the actuary takes into account an expected rate of return and other factors (e.g., mortality) when determining the required contribution each year. The actual investment results can serve to cause the required contribution to increase or decrease from year to year based on whether or not they exceed projected returns. The investment results do not alter the benefit the employee receives.