As an independent contractor, you may not have access to the same benefits as a traditional employee, such as health insurance and retirement plans. However, there is a type of retirement plan that may be available to you – an independent contractor defined benefit plan.
What is an independent contractor defined benefit plan?
A defined benefit plan is a type of retirement plan that guarantees a specific benefit amount at retirement, based on the employee’s salary and years of service. In the case of an independent contractor defined benefit plan, the plan is set up by the independent contractor for their own benefit.
How does it work?
The independent contractor sets up the plan and makes contributions to the plan each year. The amount of the contribution is based on a calculation that takes into account the contractor’s age, expected retirement age, and expected benefit amount. The contractor can contribute up to a certain limit each year, and the contributions are tax-deductible.
Once the contractor retires, they will receive a fixed amount of income from the plan each year for the rest of their life. The amount of the benefit will depend on the plan’s calculations and the contractor’s contributions.
Why choose an independent contractor defined benefit plan?
There are several benefits to choosing this type of retirement plan as an independent contractor:
1. Tax savings – Contributions to the plan are tax-deductible, reducing your taxable income.
2. Guaranteed income – The fixed benefit amount provides a guaranteed stream of income in retirement.
3. High contribution limits – The contribution limits for defined benefit plans are higher than other types of retirement plans, allowing contractors to save more for retirement.
4. Control – As the plan owner, the independent contractor has complete control over the plan’s investments and management.
5. Catch-up contributions – Defined benefit plans allow for catch-up contributions in the years leading up to retirement, allowing contractors to make up for any missed contributions.
In conclusion, an independent contractor defined benefit plan can be a valuable tool for independent contractors looking to save for retirement. It provides a guaranteed stream of income in retirement, tax savings, and higher contribution limits than other types of retirement plans. If you are an independent contractor, consider speaking with a financial advisor to determine if this type of plan is right for you.