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Defined Benefit Plan for Self-Employed.

Definition and Example.

A defined benefit plan (DBP) is a type of pension plan in which an employer promises to pay a fixed amount, on a predetermined schedule, to an employee or employees upon retirement or at a specified time after retirement. DBPs are very popular in the US because they provide a guaranteed income stream in retirement.

 

There are a few things to keep in mind when creating or managing a Defined benefit plan for the self-employed. First, the plan must be set up in the name of a company so that it can be taxed as a company benefit. This means that the company must have a corporate tax ID number and the plan must be registered with the Internal Revenue Service (IRS). Second, benefits must be clearly spelled out in plan documents. Third, the plan must be funded and the employer must be able to make the promised payments. Finally, the plan must be reviewed and regularly updated to reflect changes in the business or the individual’s retirement goals.

 

Defined Benefit Plan Example:

Employment Status: Self Employed

Three-year average earnings: 100,000 in W-2 compensation/Schedule C income/K-1 income

Age of Participant: 50

 

A participant with the parameters mentioned above can accumulate $1,248,535.08 until his retirement age of 62 years.

In the first year, a maximum of $105,788.00 can be contributed to the defined benefit plan.