Thanks to the Pension Protection Act of 2006, pensions may be going the way of the Greatest Generation that enjoyed them. Three decades ago, 39% of active private-sector employees had traditional pension plans. Today, the figure is down to 19% (about 22 million workers).1
Although most large companies are moving away from traditional defined-benefit plans, a solo defined-benefit plan may be an attractive pension option if you are a sole proprietor or are self-employed.
Savings Right on Target
Defined-benefit plans allow much larger contributions than many other retirement plans. With a solo defined-benefit plan, the company makes annual deductible -contributions to the business owner’s account. These plans are designed to pay out a set level of benefits (or target benefit) after the individual retires. Figuring the exact -contribution amount involves a complex formula that -factors in an individual’s age and target benefit amount. This target amount is often based on a person’s average annual salary, a flat monthly amount, or a formula based on years of service. The maximum annual target benefit that can be funded for the 2007 tax year is $180,000 (adjusted annually for inflation).
When the target benefit amount has been set, the company must continue to make annual contributions in amounts sufficient to fully fund the plan and to reach the target benefit amount before the individual retires. Contributions to solo defined-benefit plans are generally tax deductible, and any earnings accumulate tax deferred.
Pay to Play
As with most other retirement plans, there are fees -associated with setting up and maintaining a solo defined-benefit plan. There is an initial plan setup fee and an annual fee for actuarial services, which are required to ensure that the investments are on track to reach the funding requirements. There may also be an account maintenance fee.
If you plan to put a lot of money away for retirement over the next several years, a solo defined-benefit plan could be appropriate for you. Call today to discuss how you might benefit from a pension plan.
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