Self-Employed? Save for Retirement with a Defined Benefit Plan

Daniel Penzing
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What is a Defined Benefit Plan?

A defined benefit plan comes with many tax and other advantages. It can also be a good way to save for retirement. Some people don’t realize that even self-employed people are eligible for this type of plan. If you’re self-employed, consider a defined benefit plan.

If you’re not sure whether a defined benefit plan is a good idea for you, consider these benefits.

Reduce Taxes

This type of plan can drastically reduce the taxes you pay. The money in the account has already been taxed before you deposit it. So, when you take it out, you will pay little to no taxes.

You can invest the money in a variety of different securities, including stocks and bonds.

One big advantage to defined benefit plans is that you can vary the amount you contribute to it each year.

How the Defined Benefit Plan Works to Your Advantage

Defined benefit plans are directly based on compensation (salary, bonuses, benefits). They are also based on years of service, thus traditional defined benefit plans have the advantage of certainty. No longer creating costs for employers on the back-end, many defined benefit plans offer the option to convert to a cash balance plan, which allows the employee/participant to have more control over the investment of their contributions.

Things You Should Know about Defined Benefit Plans

If you’re self-employed, chances are you’re hoping to retire on your own terms. But if you’re like many other American workers, you just don’t have the extra cash to put away as much as you’d like. For self-employed workers, if you don’t have a retirement plan at your job, or you just don’t have one at all, your next best option could be a defined benefit plan … if you meet certain criteria.

What is a Defined Benefit Plan?

A defined benefit plan is a specified payout you’ll receive from an employer when you retire. That amount is based on how much you earn and how long you worked for the company. One of the most common types of plans is a pension. But there are also profit sharing and cash balance plans. The employer sets the amount of money you’ll receive each month, and you choose when to start taking your benefits.