Ep. 92 How High-Income Business Owners Can Supercharge Their Retirement Savings
How Can High-Income Business Owners Supercharge Their Retirement Savings?
Business owners with significant surplus cash flow often seek ways to maximize their retirement savings while minimizing tax burdens. Traditional retirement plans like 401(k)s and SEP IRAs offer tax deferral, but they come with contribution limits that may not fully utilize the financial potential of high-income earners.
However, there is a solution: Defined Benefit Plans designed specifically for high-earning business owners. In this episode of the Live Life Liberated podcast, Centura Wealth Advisory’s Sean Clark, Wealth Advisor, and Christopher Hyman, Director of Insurance Solutions, discuss how these plans work, their benefits, and key considerations for implementation.
What Are Defined Benefit Plans?
Defined Benefit Plans differ from Defined Contribution Plans (such as 401(k)s) in that they establish a set benefit to be received in the future, rather than limiting contributions based on annual IRS limits. This allows for significantly larger contributions—potentially millions of dollars per year—providing a powerful tax deferral strategy for business owners.
Key Benefits of Defined Benefit Plans
- Higher Contribution Limits – Unlike a 401(k) or SEP IRA, Defined Benefit Plans allow business owners to set aside significantly more pre-tax income for retirement.
- Tax Efficiency – Contributions reduce taxable income in the current year, providing immediate tax relief while deferring income taxation until retirement.
- Customization – Plans can be tailored to suit the needs of business owners and select employees.
- Life Insurance Integration – Incorporating life insurance into the plan structure can enhance tax advantages and provide additional security.
Who Benefits Most from Defined Benefit Plans?
These plans are best suited for:
- Business owners with annual incomes exceeding $2 million.
- Companies with a small, select group of highly compensated employees.
- Business owners looking to maximize retirement contributions before an upcoming business sale.
- Individuals interested in deferring large sums of income for tax planning purposes.
How Does the Process Work?
1. Plan Design & Setup
The process begins with an actuarial analysis to determine contribution limits based on business financials and employee census data. The plan is then structured to maximize benefits for the owner and selected employees.
2. Maintenance & Ongoing Contributions
Each year, contributions must align with the plan’s funding range, ensuring compliance while optimizing tax benefits. Investment strategies are designed to manage risk and align with plan liabilities.
3. Plan Termination & Rollout
When a business is sold or the owner transitions to retirement, the plan is rolled out to individual IRAs, allowing continued tax-deferred growth. If structured correctly, the plan can avoid excise taxes on overfunding and provide additional financial flexibility.
Why Consider Life Insurance in a Defined Benefit Plan?
- Increases Contribution Limits – The IRS permits higher contributions when life insurance is part of the plan.
- Provides a Discounted Payout – The policy can often be distributed at a fraction of its actual value, creating additional tax efficiencies.
- Offers an Additional Retirement Asset – Policies can be converted into tax-free income sources upon distribution.
Final Thoughts
For high-income business owners, a Defined Benefit Plan offers an opportunity to significantly increase retirement savings, optimize tax planning, and enhance long-term financial security. However, these plans require careful structuring and ongoing management to ensure compliance and maximize benefits.
If you’re a business owner with surplus cash flow and looking for ways to supercharge your retirement savings, reach out to Centura Wealth Advisory to explore how a Defined Benefit Plan might work for you.
Disclaimer
The information covered in this blog represents the views and opinions of the speakers and does not necessarily reflect the views of Centura Wealth Advisory. This content is for informational and educational purposes only and is not intended as financial, tax, or investment advice. Always consult with a qualified financial professional before making any investment decisions.
