Viewing Question: An accountant is telling me I could save a lot of money on taxes by setting up a defined benefit plan is this a good idea?

1 Response

  1. Without knowing more about your situation, I can’t tell you exactly whether it makes sense in your case. Here are a few things to keep in mind:

    When you set up a defined benefit plan your company makes contributions to a pension fund for yourself and your employees. The company gets to make a deduction for pension contributions, and the money can accrue tax deferred until retirement.

    Because these are pensions rather than employee funded plans (like a 401k), you if you set this up, you will have to continue to make contributions each year whether or not your business is profitable. If the investments of the pension don’t grow fast enough, you may also be on the hook for making catch up contributions. On the other hand, if you put too much into the plan, you will lose some of your deductions. There is a delicate balance with these plans and it requires close work with an actuary.

    It is expensive to set these up, and the IRS does not like it if you quickly close a plan. You should be prepared to contribute to the plan for at least 5 years. These plans are expensive, but the tax savings can be enormous over the long run. They’re best for businesses with small workforces where the employee owners are significantly older than the other employees.

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