Like HowStuffWorks on Facebook!

10 Retirement Planning Tips for the Self-Employed


2
Late Bloomer? Try a Defined Benefit Plan
Defined benefit plans are attractive to high-income earners who start saving for retirement later in life . iStockphoto/Thinkstock
Defined benefit plans are attractive to high-income earners who start saving for retirement later in life . iStockphoto/Thinkstock

We haven't talked about defined benefit plans because they much less common than solo 401(k)s, SEP IRAs and SIMPLE IRAs. According to the IRS, there are only 38,000 active defined benefit plans in the United States, and many are holdovers from the 1980s, when the plans were in fashion for larger corporations [source: IRS].

What is a defined benefit plan? Essentially, it's a pension plan. First, the self-employed business owner figures out exactly how much money he or she wants in retirement benefits per year. The next step is to work with an actuary to determine how much must be put aside each year to achieve that benefit. The loophole of defined benefit plans is that the maximum contribution limit is super high: $205,000 in 2013 [source: IRS].

This is why defined benefit plans have become attractive to high-income earners who started saving for retirement later in life [source: Sullivan]. If you have a lot of disposable income, you can stash away more than $2 million in 10 short years, enough to guarantee an annual retirement benefit of around $200,000.

There's another reason defined benefit plans are for high-rollers only; it is the most costly plan to administrate, the most complex to manage and triggers an excise tax if minimum annual contributions aren't met [source: IRS].

Finance Planning Tips

Here are some tips to help you with generating income and planning for the future.

Presented by United Way of Greater Atlanta Powered by SunTrust Foundation


More to Explore