Maximizing Retirement Plans

It is fairly common knowledge that if you have a business, setting up a retirement plan can be an excellent tax saving and investment vehicle. Unlike for virtually anything else, with a retirement plan you get a tax deduction for saving money instead of spending it. The focus of this short piece is on how to maximize what you can put into a retirement plan. 

For this purpose, as an oversimplification, there are essentially two types of retirement plans – what are called defined contribution plans (such as 401(k)s, profit sharing, SEP, etc.), and defined benefit plans (this is sort of the traditional pension plan that companies used to routinely offer many years ago and are still typical for unions). The defined contribution plan is fairly simple in concept – the amount of the contribution is defined typically as a percentage of income or something along those lines. While the amount varies between different plans and will change from year to year, and while the amount is very much dependent on what your income is, typically you are looking at maximum levels of contributions of let’s say between $30,000 & $70,000 per year. 

However, if the situation is right for you, a defined benefit plan might give you the opportunity to put away $100,000 or more each year for several years. In order to make that decision, you typically need to get an actuary, a pension service, involved. This is a complex area – but with great potential. Commonly, your accountant will work hand in hand with the pension service bureau to figure out what works best for you. Simply being able to put away a lot of money doesn’t mean you should, or that it is best for you. However, it is an option that needs to be seriously considered.