What are Benefit-Focused Retirement Plans?
A qualified retirement plan is a retirement plan sanctioned by the IRS. The contributions made to the plan are almost always income tax deductible. The monies in the plan grow tax-deferred. It is not until the plan participant takes the money out are their income taxes..
There are two main types of qualified retirement plans, One type is a defined contribution plan. The most common of these plans are 401K plans and employer-sponsored Profit-Sharing Plans.
The other type of qualified retirement plan is a defined benefit plan. These are employer-sponsored retirement plans. The amount that can be contributed for each employee is based on actuarial formulas that take into account various factors such as age, length of employment, and salary.
Benefit-Focused Plans
The Benefit-Focused Plan is a defined benefit pension plan. It is a more sophisticated retirement plan that can provide greater benefits than traditional defined benefit plans and tends to work especially well for successful entrepreneurs running smaller businesses based on the number of employees.
The Benefit-Focused Plan is a sophisticated retirement plan that can provide the business owner with a qualified retirement plan that:
• Develops financial resources that cannot be outlived
• Keeps pace with inflation and grows income tax-free
• Is protected from the claims of creditors
• Potentially is not subject to Federal estate or State inheritance taxes
The following are examples of some additional case examples where Benefit-Focused Plans proved advantageous…
• Two business owners ages 63 and 52 have a distribution company with 22 employees. One of the owners intends to retire in approximately 7 years while the other one will stay and run the company. The business owners are able to put $1,881,296 in year one into the plan with additional annual payments actuarially calculated. About 87% of the benefits from the plan will go to the business owners.
• Two business owners ages 50 and 51 with no employees. Looking for large pension contributions to ensure a lifetime pension income. They are able to put away $1,019,122 in year one with additional annual payments actuarially calculated. Because the staff for their office is covered by the hospital, they receive 100% of the benefits.
• Three dentists ages 58, 58, and 51 own and run a successful practice with 8 employees. They are able to put $2,019,157 in year one into the plan with additional annual payments actuarially calculated. About 97% of the monies will go to the three dentists.
It is important for entrepreneurs, professionals, and their advisors to recognize that, while Benefit-Focused Plans are often great ways to lower income taxes while creating a large pool of retirement assets, they are not one-and-done. So that they stay in compliance, these plans must be reviewed annually or when major changes occur like an acquisition. To continue to get the benefits, these plans might need to be tweaked as circumstances change.
Disclosure: These case studies are for illustrative purposes only. Actual performance and results will vary. These studies do not constitute a recommendation as to the suitability of any investment for any person or persons having circumstances similar to those portrayed, and a financial advisor should be consulted. These case studies do not represent actual clients but are hypothetical composites of various client experiences and issues. Any resemblance to actual people or situations is purely coincidental.”
