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Defined benefit plan, age of viability

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  • Defined benefit plan, age of viability

    Hi, I was wondering if anyone had any information on when defined benefit plans begin to make financial sense in general based on age? I am making the assumption that the person starting the plan is able to allocate the maximum amount in the short amount of time due to high level of income.

  • #2
    I received a little bit more information, apparently implementing the plan will be around $3000, followed by around $1900 per year cost. This will allow $150k of tax shielded investments per year. It is worth mentioning that it will decrease the amount I am able to invest into my solo 401k by around $20k. From what I can tell this would be worth it as my tax bracket is easily 37% federal in addition of self-employed taxes of course. Any feedback is helpful but as far as I can tell the fees would definitely be much less than the likely gain.

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    • #3
      I have zero expertise but I also don't understand what questions you are asking.

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      • #4
        https://forum.whitecoatinvestor.com/...%7D&btnSubmit=

        Search "Defined Benefit Plan" in title using the advanced search .

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        • #5
          Originally posted by Walla189 View Post
          I received a little bit more information, apparently implementing the plan will be around $3000, followed by around $1900 per year cost. This will allow $150k of tax shielded investments per year. It is worth mentioning that it will decrease the amount I am able to invest into my solo 401k by around $20k. From what I can tell this would be worth it as my tax bracket is easily 37% federal in addition of self-employed taxes of course. Any feedback is helpful but as far as I can tell the fees would definitely be much less than the likely gain.
          So what is the difference between 401k w/max profit sharing vs 401k w/profit sharing + CBP? $86k vs $150k?

          Assuming that's correct it's an additional $74k in a tax-deferred retirement account that will cost you ~$5k in recurring admin fees. Basically paying a 6-7% fee.

          You get liability protection of the money in a qualified tax-deferred account but have to deal with the annual paperwork and managing the investment account for the CBP.

          If you knew your income was going to stay well into the 37% bracket you could wait a couple years and then do the CBP. As you get older the amount of CBP money you can put in increases. There is a lifetime limit to how much you can put into the CBP based on your age. Link is a dated but the values in 2022 should be slightly higher:

          https://saberpension.com/2019/07/12/...ifetime-limit/

          So it also depends on your retirement age goal.

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          • #6
            Originally posted by zlandar View Post

            So what is the difference between 401k w/max profit sharing vs 401k w/profit sharing + CBP? $86k vs $150k?

            Assuming that's correct it's an additional $74k in a tax-deferred retirement account that will cost you ~$5k in recurring admin fees. Basically paying a 6-7% fee.

            You get liability protection of the money in a qualified tax-deferred account but have to deal with the annual paperwork and managing the investment account for the CBP.

            If you knew your income was going to stay well into the 37% bracket you could wait a couple years and then do the CBP. As you get older the amount of CBP money you can put in increases. There is a lifetime limit to how much you can put into the CBP based on your age. Link is a dated but the values in 2022 should be slightly higher:

            https://saberpension.com/2019/07/12/...ifetime-limit/

            So it also depends on your retirement age goal.

            Zlander thank you for helping me out and I apologize in advance if my post are a little unclear as writing out complex financial concepts is not my forte. So as far as I'm aware a 401k w/max profit sharing alone is $61,000 for 2022, my DBP would total $188.8k ($150K DBP, with the solo 401 reduced to $38.8 including profit sharing) As I will be managing my 401k myself the yearly fee should be $1950 unless there are other fees I'm missing.

            I also noted you specified Cash balance plan, I was looking at a traditional DBP originally unless you'd recommend otherwise?



            Originally posted by Tim View Post
            https://forum.whitecoatinvestor.com/...%7D&btnSubmit=

            Search "Defined Benefit Plan" in title using the advanced search .
            Unfortunately each case is different, even after combing through many old posts I wasn't able to find the specific answer to my question.

            Originally posted by Shant View Post
            I have zero expertise but I also don't understand what questions you are asking.
            The level of contribution increases by age, as these plans are quite expensive if you start them too early it sometimes doesn't make financial sense. I am asking the age at when to start.

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            • #7
              Originally posted by zlandar View Post
              So what is the difference between 401k w/max profit sharing vs 401k w/profit sharing + CBP? $86k vs $150k.
              $86K is incorrect for a maximum 401k contribution limit. The annual addition limit (2022 = $61K), includes all employee + employer contributions.

              The 2022 maximum standard 401k contribution is $61K.

              The 2022 maximum 401k contribution when paired with a DB plan is $38.8K:
              • Up to the employee deferral limit (2022 = $20.5K)
              • Up to 6% non-elective employer contribution on up to the compensation limit (2022 = $305K)
              • $20.5K + ($305k *6% = $18.3K) = $38.8K

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              • #8
                Sorry I don't know how I came up with the $86k number. It's $61k like you all mentioned:

                https://www.cashbalancedesign.com/re...bution-limits/

                A cash balance plan is a defined benefit plan. I assumed you were talking about a CBP when you said defined benefit. Not familiar with other types of defined benefit plans.

                So it's $61k vs $150k. Extra $89k in deferred tax retirement account and that will increase as you get older.

                So is the initial plan cost $3k followed by a $2k recurring annual fee? At that cost sounds like a good deal. Just be aware that if you make any changes to a CBP it requires submitting amendments and your plan provider will charge a couple hundred bucks per amendment.

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