To DB or not to DB, that is the question!

[SMB]

I have an owner-only client who has never had a cash flow problem.

Is there a "magic age" at which a significantly larger contribution (i.e., more than $40,000 in a DC plan) can be achieved with a DB plan?

Since my experience is limited solely to DC plans, I'd really appreciate some input from you DB folks.

Thanks!

[MGB]

It depends on the actuary chosen. The assumptions for determining contributions are chosen by the actuary. If the interest rate chosen is high, the age cutoff is high and vice versa. Not all actuaries are comfortable pushing the envelope towards too low of an assumption. Generally, the age cutoff is going to be less than age 40.

As an example: They can get approximately $2 million lump sum at age 62. Discounting at 6% to age 35 produces $414 thousand. Spread this over a 10-year contribution horizon and you get $53 thousand per year contribution. Although it is initially spread over 10 years, additional amounts will be allowable as the 415 limit increases. Once they are "maxed out" on the DB side, they can return to the DC contribution at whatever level it is at that time. So, if an actuary is comfortable with these assumptions, at age 35 they can contribute $53 thousand. If the person is older when they start, assume a 6% increase in this amount all the way up to $143 thousand per year at age 52 (it starts to slightly decline after that age).

They can still do 401(k) deferrals on top of this and if the contribution to the DB is less than 25% of comp (not much room there between $40,000 and $50,000), they can still put in a little more to the DC.