Paul and Elena are a two-career couple with young children. They are in the midst of their peak earning years as they enter their early 40’s.
- Paul works as a self-employed graphic designer
- Elena works as a lawyer for a corporate legal department.
Elena’s employer provides a full benefit package, including a defined contribution pension plan, which allows her to shelter up to $17,000 annually in a 401k.
Paul’s income varies annually, but he has consistently earned at least $100,000 over the past three years, and predicts that his network of contacts will safely send him work worth at least that much over the next five years.
- Elena’s income covers their basic family needs, and funds their children’s college funds.
- Paul’s income is therefore discretionary and can be dedicated to funding a retirement account.
To maximize their ability to build that fund over the next three to five years, we recommend a defined benefit plan:
- He can shelter up to $100,000 annually, based on his earning history.
- He can terminate the plan if his income stream fails to materialize, or if his wife loses her job and they need to live for a time on his income.
- If they need to terminate his pension plan, they would roll the outstanding balance in the account into a traditional IRA.
Anyone who is self-employed, whether they work as a sole proprietor or through a corporate structure like an LLC, can adopt a small-business defined benefit plan to shelter much or all of their self-employed income from current tax obligations.
Find out more here.