A Solo DB(k) is an owner only DB(k) plan that provides a successful business owner the ultimate in retirement plan design. What is a DB(k) you ask? It’s a hybrid of a traditional defined benefit plan (hence the DB) and a 401(k) plan (that’s where the (k) comes in). This creative combination of plans allows a business owner with no employees other than their spouses the ability to accumulate the greatest amount of tax-deferred retirement assets in a short period of time. Some of the Plan Features Include: Large Contributions: The Solo DB(k) can be designed to provide a pension benefit equal to the lesser of 100 percent of pre-retirement pay (last 3 year average) or $210,000 per year. The full retirement benefit becomes available as early as age 62. The add-on 401(k) plan give a business owner the flexibility to make salary deferrals (up to $18,000 or $24,000 for those ages 50 or over) as well as additional discretionary contributions up to 6 percent of pay. The combination of the two plans afford them the a maximum tax deductible contribution and the flexibility to adjust those contributions as business conditions dictate. A Solo DB(k) is designed for owners who want annual contributions in excess of $52,000. They can currently contribute enough to provide a maximum annual benefit up to $210,000 beginning at age 62. The add-on 401(k) profit sharing plan allows for even greater contribution and funding flexibility. Easy Administration: Solo DB(k) plan only require a single IRS Form 5500. ERISA 3(16): Included with a Solo DB(k) plan is our ERISA 3(16) services. That means all you have to do is work with your advisor to choose your investments and make contribution to the plan, we do the rest for you. Well, it’s not quite that simple, but it is really close! Deadlines: Solo DB(k) plans must be establish prior to the end of the business year. Is a Solo DB(k) Plan Right for Your Business? The Solo DB(k) plan should be considered by business owners with no employees other than their spouses who want to contribution more than $53,000 annually and are at least 45 years of age.
The owner of a small business would like to accumulate significant retirement savings over the next 10 years with the goal of retiring at age 62. In addition to the owner, the spouse works at the business. The benefit formula is 7.5% of compensation, multiplied by years of participation plus 1 past year of service to a maximum of 11 years. (This formula provides the principal with his maximum benefit under IRS §415 at retirement age 62).
A business owner who has received W-2 compensation from the business for the last 5 years has now come into an inheritance. He has sufficient assets from the inheritance such that he does not need his income from the business for current expenses and would prefer to minimize current taxable income from the business. By establishing a defined benefit plan, the business owner can reduce compensa- tion to a small amount and can make large contributions to the plan on his behalf with the money he would have paid himself. To do this, he pays some, or all of his living expenses from the inherited monies, takes little compensation from the business and puts the monies he would have paid himself as compensation into the plan as contributions on his behalf. The net result is the same as if the business owner had moved taxable assets (the inherited money) to tax-deferred assets (the qualified plan).