Thinking about Retirement Income?

It’s been a rough couple of year, but those of us hanging on to jobs of some form may be looking at our savings and investments and wondering,

What have you done for me lately . . .

If you are someone else’s employee, there isn’t much you can do. But, if you have your own company . . . or you care to create your own company either for the consulting advice you give or for the items you sell on etsy, you have options.

One of those options is a Defined Benefit plan. Nick Paleveda is the kingpin of DB plans and was kind enough to sit down with me for a few questions. In brief, the DB plan is great for those who have profits greater than $49,000 (after salaries). But with less than that . . . stick with your 401k and IRAs.

The reason I was turned on to DB plans? Great way to legally stash $300,000 a year, tax free. Also allows significantly more flexibility in your investment options for the funds. You can invest in private equity positions, your local dry cleaner for example, or regular publicly traded funds – much great range of options than your corporate 401k most likely.

First, a word of warning, you must own your own business to set up a Defined Benefit plan. A defined benefit plan must be set up by the corporation, LLC or sole proprietor who OWNS the business. An employee cannot set up one for themselves.

The main deterrent has been the perceived cost. As it turns out, you can set up a DB for yourself for approximately $600/year. Without further adieu, the interview with Nick:

Hi Nick, let’s dial into the needs of my Miss Mentor crowd. Most are Age 24-35, mostly pre-graduate school, some recently post grad school, many with significant educational debt.  Almost all are employed in relatively high paying positions (large law firms, consulting firms, Investment banks, $125k+), but have received scant knowledge (with entirely too much information) on personal finance. Some also have their own consulting practices or would like to . . . many make the financial decisions of the household – mix of married and unmarried.

1. What exactly is a Defined Benefit (DB) plan? I’ve heard about Keogh plans, but only know enough to be moderately dangerous.

From 1974-1986 the primary retirement plan in the USA was a defined benefit plan. This plan allowed tax deductible contributions, earnings to accumulate tax deferred and lifetime income or lump sums at retirement. In 1986, the Tax Reform Act of 1986 placed severe limitations on funding these plans, and hence, plan sponsors discontinued these plans. In 2001, EGTTRA brought back the tax and retirement benefits for these plans. These plans are NOT for everyone. They are for people who can afford to put away more than $49,000 for retirement. If you plan to put away less, use a profit sharing plan. Defined benefit plans are more expensive to set up and maintain than the profit sharing plan and are more regulated. The DB plan is regulated by the IRS, Department of Labor and PBGC.
2. How will a Keogh give me flexibility to handle life events: going back to school, getting married, buying house, having baby?

It will not help.

3. Does this create conflicts with spousal income, what if my status changes married-to-single or single-to-married?

No conflict with spousal income, but if you create a DB plan and become a participant, the spouse has certain rights to the plan that cannot be alienated using pre and post nuptial agreements.

4.Can this help me retire any portion of student loan obligations faster?


5. If I set up a DB plan for my consulting practice, can my spouse participate even though he has a plan at his place of work?

Only if the spouse also works in your company.

6. Is there a good rule of thumb for when to chose DB over other investment options?

A DB plan is not an investment. It is akin to opening a very huge IRA that must be funded ear year.

7. Are there any other considerations I have over-looked?
Yes- DB plans are very technical and very regulated. Many people in this age group would not be suitable for this plan.

8. Would this conflict with existing 401ks/IRAs/pensions?

Today you can have your 401(k) and defined benefit and profit sharing plan and deduct all three. This was result of a change in the Pension Protection Act of 2006.

9. Is there an optimal time to start a DB plan? Is that triggered by an income generation point or something else?

A defined benefit plan you should look at if you have profits after salary of $49,000 or greater.

10. How do you expect the power of the DB plan to play out over the next 5 years?

Defined benefit plans will become more popular in the small plan market as income taxes increase for people making over $200,000. The real popularity will depend on a persons desire to reduce taxes and increase retirement assets.

Learn more about small firm retirement plans from <a href=”″>Nicholas Paleveda</a> in his May 2009 Journal of Accountancy Article.