When a Profit Sharing Plan is NOT Enough

Your client has a Profit Sharing/401k Plan that has been in place for several years. He is generally satisfied with the performance of the plan but desires greater retirement benefits than those provided by a Profit Sharing/401k Plan.  In addition, he is interested in putting more money away for retirement.  This is a common problem, as a business grows and becomes more successful, and is easily addressed by the adoption of a defined benefit plan.

The maximum deductible contribution to a Profit Sharing/401k Plan is currently $54,000 per participant.  If we assume that your client is age 55 and plans on retiring at age 65, and we further assume that he will make a $54,000 contribution for 10 years and earn 3% interest, he will have $637,621 at retirement. 

If your 55-year old client adopted a defined benefit plan, he could make a deductible contribution of approximately $221,185 per year for ten years and have $2,513,755 at retirement.  In addition, your client could maintain his Profit Sharing/401k Plan. However, in most cases, the contribution to the Profit Sharing/401k Plan would be limited to 6% of compensation, plus the 401k elective contribution and catch up contribution if the participant is age 50 or older.

As part of the annual review of his retirement plan, your client is depending on his advisors to assess his needs and provide options that will meet his objectives. Too often, the client's CPA is not familiar with the rules regarding qualified pension plans, and, as a result, the opportunity to increase retirement income is not presented to him.  We urge you to discuss the merits of a defined benefit plan with your clients and CPA contacts. Your clients will thank you for it. For more information, contact RMC!