Pension plans for small business owners

Defined benefit pension plans provide an excellent option for small business owners looking to save for retirement.  Similar to SEP-IRA’s and 401K plans, business owners can use these plans to save in a tax deferred manner.  The advantage of these plans is that they allow for larger contributions for the business owners, and are therefore ideal for highly compensated owners or partners of small businesses.  The disadvantage is that they are more time consuming and costly to administer than many of their alternatives.  Contributions to defined benefit pension plans are typically tax deductible to the business, and earnings grow tax deferred until they are withdrawn or paid out.  Unlike a SEP IRA or 401K plan, contributions must be made every year.  The contribution amount is based on a number of factors including age, compensation, retirement age, and assumed rate of return on pension assets.  If the business has employees, they must typically be included in the plan.