Defined Benefit Plans for Sole Proprietors

Sole Proprietor

If you’re self-employed, your retirement choices are not limited to a Simplified Employer Pension Plan (“SEP”) or other defined contribution plans.  Sole proprietors can establish a defined benefit plan.  Depending on your age, the annual tax-deductible contributions you may make can be much larger than the $52,000 maximum allowed under your typical Profit Sharing Plan.

Defined Benefit plans are a great option for sole proprietors who want to reduce their taxes and accumulate significant savings for retirement.

With a defined benefit plan, the actuary will help you project a payout at retirement and then will determine a yearly contribution to meet that target.  The calculations are based on your age, compensation, years to retirement and expected return on assets.  The older you are, the larger the possible contribution is to a defined benefit plan.

Example 1: a 52 year old sole proprietor, with net Schedule C compensation (after the DB contribution) well over the compensation limit ($260,000 for 2014) could count on depositing approximately $175,000 annually (depending on asset performance). This assumes Normal Retirement at age 62.

Example 2: a 60 year old sole proprietor, with net Schedule C compensation (after the DB contribution) well over the compensation limit ($260,000 for 2014) could count on depositing approximately $200,000 annually (depending on asset performance).  This assumes Normal Retirement at age 65.

Once the contribution level is established, assuming reasonable returns on assets, the contribution will normally remain at roughly the same level over the ensuing years.  If you are unable to make the required contributions, you may face penalties imposed by the federal government.  If you have large fluctuations in income, this is something to discuss with your actuary.

When establishing a defined benefit plan, the IRS requires that the plan be “permanent”.  Conventional wisdom is to plan on maintaining the defined benefit plan for a minimum of 3-5 years.  Changes in your business can impact the life of the defined benefit plan. At Normal Retirement or some earlier date due to business reasons, the plan could be terminated.

At the point of the termination and dissolution of the defined benefit plan, the proceeds can be rolled over to an IRA, avoiding income tax at retirement.


Contact Our Defined Benefit Plan Team

Pinnacle Plan Design is a third-party administrator (TPA) of employer-sponsored qualified retirement plans. We specialize in retirement plan design, administration and actuarial consulting. Pinnacle has offices in Tucson and Phoenix, Arizona (AZ) as well as Houston, Texas (TX), and we proudly serve clients nationwide.

Schedule a Call

Let's talk!

Close