Custom Retirement Plans Can Build Income

Retirement plans are a mystery to many. It’s no surprise that many small business owners can have a difficult time funding a retirement plan that perfectly fits their needs and does not have them asking, “Is this as good as it gets?” One of the services my firm provides is identifying and implementing customized retirement plan designs for business owners who need something a bit more sophisticated than a one-size-fits-all retirement plan. We tailor to your financial situation after a thorough discovery process. Here’s an example of what a customized retirement plan can accomplish:

Meet Steve. Steve is a 50 year-old owner of a small software development outfit. He has been having a difficult time finding a retirement plan for himself and his two associates, both of whom were earning $105,000 in salary and bonuses annually. Steve was limiting his W-2 wages to $100,000, taking the balance as distributions from his subchapter S corporation. Recently, he had finalized a prolonged divorce that had taken a significant portion of his income over the last few years, dramatically reducing his personal asset base, and, consequently, compromised his retirement readiness.
Steve’s firm was funding a prototype profit sharing plan established a few years back through a household name brokerage firm. Because of the limited contribution formulas available in the prototype plan, he was contributing the same percentage of salary (20%) for himself and his two associates. To receive an annual allocation of $20,000, Steve was forced to provide $42,000 for his employees. He was frustrated that he was giving up more in employee costs than he was saving in taxes and was considering terminating the plan.

Steve’s W-2 wages = $100,000 and plan funding = $20,000
Employee 1′s W-2 wages = $105,000 and plan funding = $21,000
Employee 2′s W-2 wages = $105,000 and plan funding = $21,000

The obvious question was, “Is there a more efficient solution?” One of the plan design experts at our firm was able to point out one step that the client could execute on immediately—reallocating a portion of the S corporation distributions to increase the client’s W-2 wages to the maximum plan compensation of $245,000. Since the client was near the 2009 Social Security wage limit ($106,800) the payroll taxes on the additional wages were largely limited to the combined 2.9% Medicare taxes. By paying an additional $4,200 in payroll taxes, Steve would be able to increase his deduction to the prototype plan to $49,000, thereby realizing net tax savings of about $7,000. While this was a definite improvement, it still left him with a $42,000 plan funding cost for the employees.

Steve’s W-2 wages = $245,000 and plan funding = $49,000
Employee 1′s W-2 wages = $105,000 and plan funding = $21,000
Employee 2′s W-2 wages = $105,000 and plan funding = $21,000

An individually-designed solution would offer a better outcome. And a Cross-Tested 401(k) Profit Sharing Plan was proposed. Since Steve turned 50 in 2009, adding a 401(k) feature allowed him to make a $5,500 catch up contribution in addition to the normal 401(k)/Profit Sharing limit of $49,000 (for a total of $54,500). The allocation to the two younger associates was limited to 5% of their compensation. This reduced their cost
from $42,000 to $10,500.
Steve’s W-2 wages = $245,000 and plan funding = $54,500
Employee 1′s W-2 wages = $105,000 and plan funding = $5,250
Employee 2′s W-2 wages = $105,000 and plan funding = $5,250

Case design specialists inquired whether Steve might be interested in further enhancing his retirement savings by adding a Defined Benefit Plan. Utilizing a defined benefit plan would create a much larger deductible contribution, although it would reduce slightly the allocation to the Cross-Tested 401(k) Profit Sharing Plan. The defined benefit plan allowed Steve to fund $135,000 for his benefits in the defined benefit plan, with a cost of only $4,409 for the two employees. Between the two plans, Steve would be able to fund over $170,000 towards his retirement, with a total cost of less than $15,000 for his associates.

Steve’s W-2 wages = $245,000 and plan funding = $171,400
Employee 1′s W-2 wages = $105,000 and plan funding = $7,785
Employee 2′s W-2 wages = $105,000 and plan funding = $7,124

What does it mean to the client short-term and long-term? With implementation of the plan, the client:
• Reduced his employee funding costs from $42,000 to $15,000
• Improved efficiency of the existing plan by 300%
• Increased his tax-favored savings 800%—from $20,000 to $171,400
• Reduced his taxes (net of employee costs and payroll taxes) by $59,400
In the long term, Steve will most likely be able to restore his asset base and successfully prepare for retirement. The proposed qualified plan strategy will allow him to have access to $175,000 (net after tax) for a period of 25 years, from age 65 to 90, assuming 10 years of contributions and 6.5% growth.
In the coming year, the IRS is requiring that all defined contribution plans be fully restated onto a new document that complies with the changes in pension law contained in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). You may recall that the most recent requirement of this kind was associated with GUST, when every plan sponsor was required to bring their retirement plans in compliance with the series of laws passed from 1994 to 1997. While the changes brought about by EGTRRA have already been adopted by most plans through good faith amendments, the IRS is now requiring a full restatement of all defined contribution plans so the plan document itself contains the required EGTRRA language.
Because the entire document must be restated to include the new provisions required by EGTRRA, this is an ideal time to consider whether you might benefit from including some optional provisions that could help you reach your business and retirement objectives more efficiently.
Please feel free to call or e-mail me to discuss how we may be able to make your plan more efficient, flexible, and responsive to your business and personal needs.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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