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Similar a Strategic Retirement Plan Designs for Professional Practices 92011
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Strategic Retirement Plan Designs for Professional Practices 92011
- 1. Strategic Retirement Plan Designs for High Income Professionals A discussion of how to generate high tax deductions and accelerated retirement savings though qualified plan options. © 2011 | ExpertPlan | Retirement Plan Services
- 4. The Basics - Defined Contribution Plans © 2011 | ExpertPlan | Retirement Plan Services Defined Contribution (DC) Plans: permits employee contributions to be deducted , employee contributions are always 100% vested whereby employers contributions more often have vesting schedules which are stated under the terms of the plan (this plan is also referred to as individual account plan since each participant has a separate account for accruing plan contributions, and they bear the investment risk) Here are some examples of DC plans-Defined Contribution Plan Types: Simple - $11,500/$2,500 401(k) Profit Sharing The maximum contribution to an employee’s account during plan year 2011 is $49,000. W ith the catch up provision, for employees age 50 and older their maximum is $54,500
- 5. Profit Sharing Plans Integrated Profit Sharing Plan Age-weighted Profit Sharing Plan Cross-Tested Profit Sharing Plan (also referred to as Super Integrated, New Comparability or Tiered Allocation) © 2011 | ExpertPlan | Retirement Plan Services Profit Sharing Plans: provides the maximum flexibility in employer contribution. A specified contribution is not required each year. The employer may vary the contribution from year-to-year or not contribute at all, to reflect the cash flow profitability of the practice or other business considerations Minimum Contribution: None Maximum Contribution: 25% of total payroll Maximum Allocation to an Individual: Lesser of 100% of W-2 or $49,000 (indexed)
- 7. © 2011 | ExpertPlan | Retirement Plan Services Are there discrimination tests? The discrimination test is passed if the employees in the favored groups are older than the employees in the less favored groups with lower contribution percentages. Allocation to non-highly compensated employees must be at least 1/3 of that provided to HCE’s or 5% (if less) Absolutely! - It works best for 401(k) plans in which the highly compensated employees need to get a higher contribution Can New Comparability be used with a 401(k) Plan? Paired with a “safe-harbor” employer contribution of 3% of pay, it allows the highly compensation employees (“HCE’s”) to maximize their deferrals ($16,500 for 2011 plus catch-up, if applicable) The plan is tested for nondiscrimination on a cross-tested basis This allows the plan to offer a higher contribution rate to older participants as the contributions are converted & tested at retirement age.
- 8. New Comp Profit Sharing Allocation Example © 2011 | ExpertPlan | Retirement Plan Services Dr. Dan 56 $245,000.00 $32,500 13.27% $54,500.00 Dan’s Wife 51 $64,000.00 $10,656 16.65% $32,656.00 DH1 42 $53,000.00 $2888 5.45% $5,538.50 DH2 39 $48,000.00 $2616 5.45% $5,016.00 Sec 26 $32,000.00 $960 5.45% $3,344.00 Asst 2 28 $13,000.00 $390 5.45% $1,358.50 Asst 1 23 $10,000.00 $300 5.45% $1,045.00 Employee Age Compensation Contribution WITH new comp max numbers Ps % Total w/Max
- 9. Defined Benefit Plans © 2011 | ExpertPlan | Retirement Plan Services Defined Benefit Plans: promises to provide a participant a monthly benefit beginning at retirement and payable as long as he lives. The amount of this benefit is usually based years of service and how much the participant earned during his highest-paid three consecutive years of employment . The maximum annual lifetime benefit payable to participant with a retirement age of age 62-65 is $195,000 in 2011. DB plans maximize the contributions to older employees DB plans provide employers with the potential for much higher contribution levels than defined contribution plans. There are two types of Defined Benefit Plans Cash Balance Traditional
- 12. © 2011 | ExpertPlan | Retirement Plan Services Example Sole proprietor earning $500,000 age 60 has a 25% SEP Plan. Needs a higher tax deduction than $49,000. Solution – install traditional defined benefit plan. New contribution of $200,000 meets needs of client.
- 13. © 2011 | ExpertPlan | Retirement Plan Services Doctor is a partner in a thriving corporate practice. He/she has also received additional consulting compensation of $50,000 annually for several years. Doctor would like to shelter all $50,000 of this separate sole proprietor income. Solution – install a traditional defined benefit plan for his sole proprietorship. Base benefits on prior historical compensation. Example
- 14. Example of Solo DB contributions © 2011 | ExpertPlan | Retirement Plan Services Earned Income $50,000 $100,000 $150,000 $200,000 $300,000 Age Annual Contribution 40 $19,000 $38,000 $57,000 $74,000 $74,000 45 $25,000 $50,000 $75,000 $97,000 $97,000 50 $33,000 $65,000 $98,000 $127,000 $127,000 55 $43,000 $85,000 $128,000 $166,000 $166,000 60 $56,000 $111,000 $167,000 $217,000 $217,000 65 $58,000 $115,000 $173,000 $225,000 $225,000
- 20. © 2011 | ExpertPlan | Retirement Plan Services
- 21. Example Maximum Contributions © 2011 | ExpertPlan | Retirement Plan Services
- 22. Interest crediting rate © 2011 | ExpertPlan | Retirement Plan Services Not Less than 0% and Must be a “market rate” 7-Year Treasury Rate + .25% = 3.3% 30-Year Treasury Rate = 4.56% Third segment rate = 6.75% Pension Protection Act of 06 Common Choices
- 23. Interest Crediting Rate Factors © 2011 | ExpertPlan | Retirement Plan Services Actual ROR (%) 4.56% 5.00% 2.00% 00.0% -2.00% -5.00% Contribution $75,000 $75,000 $75,000 $75,000 $75,000 $75,000 Actual ROR ($) $3,420 $3,750 $1,500 $0 $(1,500) $(3,750) EOY Assets $78,420 $78,750 $76,500 $75,000 $73,500 $71,250 Target Funding $78,420 $78,420 $78,420 $78,420 $78,420 $78,420 Over/(Under) Funding $ 0 $330 $(1,920) $ (3,420) $(4,920) $(7,170) Target
- 26. Example 1 – The Numbers! © 2011 | ExpertPlan | Retirement Plan Services Principals 401(k) Deferral $16,500 Safe Habor $ 0 Profit Sharing $12,250 Cash Balance $64,680 Total $93,430 Rank & File 401(k) Deferral N/A Safe Habor $ 4,872 Profit Sharing $7,000 Cash Balance $4,185 Total $16,057 Benefit Ratio 85.33%
- 28. © 2011 | ExpertPlan | Retirement Plan Services Principals (2) 401(k) Deferral $44,000 Safe Habor $13,080 Profit Sharing $8,720 Cash Balance $305,200 Total $371,000 Rank & File 401(k) Deferral N/A Safe Habor $2,770 Profit Sharing $3,694 Cash Balance $2,309 Total $8,773 Benefit Ratio 97.69%
- 29. © 2011 | ExpertPlan | Retirement Plan Services DB Plan Features DC Plan Features Cash balance plans are designed to leverage advantages of DB and DC plans Employer retains tax advantages on investment returns Efficiency of DB funding Accrued benefit cannot decrease Reduce cost volatility Valuable benefits for a mobile workforce Level accrual pattern rather than back loading towards end of career Portable, account-based plans that are easy to understand
- 32. Is a Cash Balance Plan tax-efficient? © 2011 | ExpertPlan | Retirement Plan Services Plan 9% to employees versus Uncle Sam 91% to Owners ($455,000) No Plan 40% tax ($200,000) 60% to Owners ($300,000) $500,000 40% tax bracket The tax savings with a well designed pension program can be startling
Notas del editor
- Read slide then point out… With a Defined Contribution Plan the contribution made each year is subject to an annual contribution limit. The Plan currently satisfied IRS discrimination rules by providing the same contribution rate / percentage to all employees. For 2010, the maximum contribution that can be allocated to the account of any participant in a Defined Contribution Plan is $45,000 ($50,000 if over the age of 50.)
- Talking Points: Read slide …
- Cash Balance: (differs because the annual contribution has a guaranteed interest rate for accrual proposes) This should be stated by the speaker after reading paragraph 1. This plan in contrast pools the plan funds, participants annual statements reflect accrued benefits and the employers bear the investment risk Next state this: These plans provide employers with the potential for much higher contribution levels than defined contribution plans. The employer contribution is determined each year as the amount needed to fund the benefits provided by the plan. The employer contributions will change to reflect changes in compensation, changes in plan participation and earnings on plan assets. (these plans can potentially be over or under funded) These plans maximize the contributions to older employees.
- With a Defined Benefit Plan the benefit provided at retirement is subject to a benefit limit. ($195,000 for 2010) For this reason Defined Benefit Plans are often considered to favor older employees. A much higher contribution can be allocated for the benefit of a participant in the Defined Benefit Plan and is mandatory funding each year giving employers little or no flexibility A combination of Defined Benefit and Defined Contribution Plans can achieve the following objectives: A higher total contribution amount in both plans for owners. Flexibility to design classes of participants that will receive benefits at different levels. A smaller allocable share of costs for employees. The continued opportunity for participants to regulate their contributions by their elective deferral and catch up contributions. --------------------- Read the slide. Specifically focus on what the combo DB/DC plan can “achieve” A higher total contribution amount in both plans for owners. Flexibility to design classes of participants that will receive benefits at different levels. A smaller allocable share of costs for employees. The continued opportunity for participants to regulate their contributions by their elective deferral and catch up contributions.
- Small Company Plan Benefits Contribution limits can be much higher than a defined contribution plan Benefit formula for owners can be substantially higher than for non-owners providing non-discrimination testing is satisfied Maximize discrimination and dollars by pairing with a 401(k) profit sharing plan. Key Factors of a Cash Balance Plan Contributions are credited to “hypothetical account” for each participant each year Participants can view hypothetical account balances like a DC plan Contributions must be fully vested after 3 years Plan assets are pooled and invested together Guaranteed interest rate is credited at set interval, i.e. quarterly, annually, etc.