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401k Defined Benefit Plan

2017-01-04

In addition to having a Defined Benefit Plan a small business owner may be able to add a 401k salary deferral option to the Defined Benefit Plan. In 2017 a salary deferral may allow an additional $18,000 contribution ($24,000 if age 50+). Each year the funding of 401k salary deferral is completely discretionary.

You can stop, decrease or increase your salary deferral contributions (up to the salary deferral limit). The Defined Benefit Plan annual contribution is mandatory and must be made annually.

Why add a 401k salary deferral to a Defined Benefit Plan?

There are 2 primary reasons to add a 401k salary deferral option.

1) A salary deferral option can be added to maximize annual tax deductible contributions. 401k salary deferral contributions are in addition to Defined Benefit Plan contributions.

2) A salary deferral option can be added to increase annual flexibility.

Example: Bill is age 55 and is self employed and has $106,000 of net income from his sole proprietorship in 2017 and does not contribute to a 401k plan through another employer. Based on Bill’s income the actuarial calculations determine he is eligible to make a contribution of about $80,028 to a Defined Benefit Plan for 2017. Bill may not feel comfortable with being committed to making that level of contribution so instead he may opt to add a 401k salary deferral feature to the Defined Benefit Plan. In doing so Bill could make a contribution of $24,000 in salary deferrals (which is flexible each year) and then make a contribution of $59,000 to the Defined Benefit Plan. This way Bill could still get a tax deduction of $83,000, but would have the flexibility to not make contributions to the 401k salary deferral if his cash flow changed. However, Bill would still have to make the annual Defined Benefit Plan contribution.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $24,000 in 2017. I also have a side business which is a single member LLC and makes $100,000 in net income and I would like to maximize my tax deductible contributions to a retirement plan. Can I have a Defined Benefit Plan?

Yes. You are eligible to establish a Defined Benefit Plan for a side business even if you participate in a 401k, 403b, 457 or Thrift Savings Plan through your primary employer.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $24,000 in 2016. I also have a side business which is a single member LLC and makes $100,000 in profits per year and I would like to maximize my tax deductible contributions to a retirement plan. Can I add the salary deferral option to my Defined Benefit Plan and contribute another $24,000 in salary deferrals?

No you can not. It is important to note that contributions made to the employer’s 401k, 403b or Thrift Savings Plan will impact the salary deferral limit for the 401k contribution for the Defined Benefit Plan. Contributions to the employer’s 401k, 403b or TSP count towards the 2017 401k salary deferral limit of $18,000 ($24,000 if age 50 or older). Contributions made into a 457 plan do not count towards the salary deferral limit.

I am age 50 and I participate in a 401k through my primary employer and I contribute the maximum salary deferral of $24,000 in 2017. I also have a side business which is a single member LLC and makes $100,000 in profits per year and I would like to maximize my tax deductible contributions to a retirement plan. Can I add the salary deferral option to my Defined Benefit Plan and contribute another $24,000 in salary deferrals?

Yes, you could make a salary deferral contribution, however contributions made to the employer’s 401k will impact the salary deferral limit for the 401k contribution for the Defined Benefit Plan.

Example: Jennifer is age 50 and works as a W-2 employee for ABC accounting firm and contributes $10,000 to the 401k in 2017. In addition to working at the accounting firm, Jennifer is self employed and the owner of an S corporation. She is the only employee and pays herself a $100,000 W-2 salary.

Jennifer could setup a Defined Benefit Plan and could add the salary deferral feature. Based on this information Jennifer would be eligible to make a contribution of $14,000 in salary deferrals (the $10,000 contribution to the ABC accounting firm 401k counts toward the 2017 $24,000 salary deferral limit). In addition to the 401k contribution, Jennifer can also make a contribution to her Defined Benefit Plan.

Learn more about the benefits of the Defined Benefit Plan

 

How Can BCM Help You?

Beacon Capital Management Advisors (BCM) is experienced in setting up defined benefit plans for the self employed, freelancers, entrepreneurs, independent contractors, small business owners and U.S. corporations. BCM is registered in 50 States. Complete the form below and a BCM Advisor will promptly respond to your inquiry.

 

Disclosures:

*The information on this page is for informational purposes only and does not constitute, and should not be construed as, professional, legal or tax advice. To determine your individual tax situation and specific needs, please consult a professional tax advisor.

*Information contained in these sections merely highlight some benefits. There are risks involved with all investments that could include tax penalties and risk/loss of principal.