What's Your Number?

[BLADEMDA]

---

Members don't see this ad.

 

[BLADEMDA]

A defined contribution plan is a type of retirement plan in which the employer, employee or both make contributions on a regular basis.[1] Individual accounts are set up for participants and benefits are based on the amounts credited to these accounts (through employer contributions and, if applicable, employee contributions) plus any investment earnings on the money in the account. Only employer contributions to the account are guaranteed, not the future benefits. In defined contribution plans, future benefits fluctuate on the basis of investment earnings. The most common type of defined contribution plan is a savings and thrift plan. Under this type of plan, the employee contributes a predetermined portion of his or her earnings (usually pretax) to an individual account, all or part of which is matched by the employer.[2] In the United States, 26 U.S.C. § 414(i) specifies a defined contribution plan as a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account.

 

[sevoflurane]

I think a DBP is pretty sweet in the right circumstance.

I'm owner of my own company. My impression is that a DBP is cost prohibitive in my situation AND at this point in my career. I think start up costs and maintenance would be 6-9K the first year. The amount you can put in there is dependent on AGE. Therefore, in a situation where you are the owner of an S-corp it makes more sense to contribute to that plan a little later in life and save on the administrative costs. A 50 y/o could put in 500K vs a 40 y/o putting in 100K per year. It seems that if your employer is forking up the cost of the plan, then it's a no brainer if you are trying to maximize your retirement accounts. I'm a little bit hazy on the particulars of my situation, but I've been through this with my accountant in the past and we decided to hold off for a while.

 

[Arch Guillotti]

A 50 y/o could put in 500K vs a 40 y/o putting in 100K per year.

500K? Can you elaborate?

Defined benefit plans can be very attractive and have significant benefits but there are drawbacks as well.

 

[Silent Cool]

All this money talk is insane. Enjoy life. My father was a doctor. Really could have retired at age 62. Wanted to work till age 65 to hit "that number" and leave extra for the kids.

Unfortunately he was diagnosed with anaplastic thryoid CA (the type that kills within 6 months at age 67). Same type as Chief Justice Rehnquist had at a similar time. He was pretty healthy until than.

You never know when your time is up. You got 5 million, you want 7 million. When does it stop?

The "top 1%" of American average net worth is about 7-8 million. How much money can one spend to be happy?

You save save save. Than what? You die.

aneftp,

I am sorry to hear about your father. I agree with your sentiments.

Re: ATC, there is an interesting company called Oxigene that is developing a novel therapy for ATC. Check it out:

http://www.oxigene.com/product-development/zybrestat/zybrestat-in-anaplastic-thyroid-cancer-atc

 

[Silent Cool]

Love it Aneftp. You are absolutley right dude. This leads me back to the real estate investment side of things discussed above.
Timing is everything.
If you wanted to buy real estate, two years ago was the time to do it. You coud lock in at 2.5% and get a heck of a deal.
Fastforwads a couple of years and that heck of a deal is worth a lot more depending on local markets.

Timing is everything.

An equally important question to ask is--> what are you planning on doing with it?

For me, it has been nothing short of bliss. While I made a lot more last year with the run up of the market, I enjoyed my real estate investment a lot more. This is a tangible aspect of my life RIGHT NOW. Not only did I get a killer deal at a super low interest rate, I use the heck out of my real estate investment.

As I said, it's not for everyone. What you plan to do with it is very important.

Just got back from the epic/cleanisng ride a couple hours ago. Helps me put things into perspective when I'm at the big shop:

This one was from a couple days ago:

It's easy to get caught up in the game. 10 mil is a great number... but make sure you're smelling the roses along the way.

What is 10 mil going to do for you when you suffer some debilitating injury at 60 y/o?

I find real estate a great way to diversify my life and it's been worth it's weight in gold.

Sev,

Do you rent out the real estate when you are not there? Like through AirBNB?

 

[sevoflurane]

500K? Can you elaborate?

Defined benefit plans can be very attractive and have significant benefits but there are drawbacks as well.

I had to dig this out for you Arch.

There are drawbacks to DP, but some major upsides depending on your situation. This is an email I received from my accountant that clarifies things a little more:

Dr. Sevo,

"The actuary establishes a range of acceptable contributions each year. The calculation takes into account the age of the participants, the assumed rate of return, the actual investment performance, and other variables. Two of the reports I saw last year gave the client a range of between $100k and $1.2million. When you receive the range, you can pick whatever number makes the most sense in your situation; but you must also realize that funding at the high end of the range will affect (reduce) the amount that you may fund in future years. Remember, in a DB plan, the actuary is attempting to calculate the amount that will be needed to support a pension, which will begin at your retirement and which will last for your life expectancy. Once you have enough accumulated, you can no longer contribute to the plan.


Several of my clients have funded $400 - $500k for a few years, then trimmed back to $100k or so, then, terminated the plan and rolled the assets into an IRA when it was “fully funded”.


Hope this helps to clarify . . . you cannot expect a plan to permit you to deduct $1million per year indefinitely. Besides, you don’t want to deduct so much that you have no taxable income. You just want to take your income down to a low enough level that your tax is being computed in the 10 or 15% range, not 40%. But, look at it this way, when you do set up the plan, you’ll be able to fund your retirement quickly and most likely in time to truly retire early."

 

[F0nzie]

I think a DBP is pretty sweet in the right circumstance.

I'm owner of my own company. My impression is that a DBP is cost prohibitive in my situation AND at this point in my career. I think start up costs and maintenance would be 6-9K the first year. The amount you can put in there is dependent on AGE. Therefore, in a situation where you are the owner of an S-corp it makes more sense to contribute to that plan a little later in life and save on the administrative costs. A 50 y/o could put in 500K vs a 40 y/o putting in 100K per year. It seems that if your employer is forking up the cost of the plan, then it's a no brainer if you are trying to maximize your retirement accounts. I'm a little bit hazy on the particulars of my situation, but I've been through this with my accountant in the past and we decided to hold off for a while.

The actuarial costs are high with a DB. It has some advantages over 401k in terms of flexibility. It definitely seems like a better deal if you are older, have your house paid off, and want to put away several hundred thousand dollars toward retirement. I thought about starting a DB but my wife and I are able to put away a combined 104k pretax in a 401k which seems adequate if we contribute that amount over the next 30 years. I think that should place us around the 7 mil mark by the time we retire. If I was the sole income earner I would probably do 52k in a 401k and another 50k in a DB.

 

[Arch Guillotti]

I think your accountant is full of it

Look at the table Blade posted above. The annual contribution limit in 2014 to a defined benefit plan is $210,000. There are actuarial determinations made for DBP's but the IRS sets the contribution limit as far as I know.

What the accountant is describing sounds like what the IRS calls an abusive tax transaction or abusive tax shelter scheme.

If you are in a group you can't just start and stop a retirement plan will nilly because it suits you for tax purposes.

I would like to know what type of DBP your accountant is referencing. I am not an expert but it doesn't sound like anything I have ever heard of.

I had to dig this out for you Arch.

There are drawbacks to DP, but some major upsides depending on your situation. This is an email I received from my accountant that clarifies things a little more:

Dr. Sevo,
"The actuary establishes a range of acceptable contributions each year. The calculation takes into account the age of the participants, the assumed rate of return, the actual investment performance, and other variables. Two of the reports I saw last year gave the client a range of between $100k and $1.2million. When you receive the range, you can pick whatever number makes the most sense in your situation; but you must also realize that funding at the high end of the range will affect (reduce) the amount that you may fund in future years. Remember, in a DB plan, the actuary is attempting to calculate the amount that will be needed to support a pension, which will begin at your retirement and which will last for your life expectancy. Once you have enough accumulated, you can no longer contribute to the plan.

Several of my clients have funded $400 - $500k for a few years, then trimmed back to $100k or so, then, terminated the plan and rolled the assets into an IRA when it was “fully funded”.

Hope this helps to clarify . . . you cannot expect a plan to permit you to deduct $1million per year indefinitely. Besides, you don’t want to deduct so much that you have no taxable income. You just want to take your income down to a low enough level that your tax is being computed in the 10 or 15% range, not 40%. But, look at it this way, when you do set up the plan, you’ll be able to fund your retirement quickly and most likely in time to truly retire early."

 

[sevoflurane]

I think your accountant is full of it

Look at the table Blade posted above. The annual contribution limit in 2014 to a defined benefit plan is $210,000. There are actuarial determinations made for DBP's but the IRS sets the contribution limit as far as I know.

What the accountant is describing sounds like what the IRS calls an abusive tax transaction or abusive tax shelter scheme.

If you are in a group you can't just start and stop a retirement plan will nilly because it suits you for tax purposes.

I would like to know what type of DBP your accountant is referencing. I am not an expert but it doesn't sound like anything I have ever heard of.

I'm no expert either and I did notice the 210k limit on DBP set by the IRS. I'm not sure of the specifics of getting around that. If you're the owner of the group/LLC/S-corp, it is my understanding that you can roll a DBP into an IRA and terminate it at any time. My accountant handles a lot of docs and other small business owners. I'll press him on the 21ok limit. I will get back to you on this as I also have a meeting set up mid July with my financial advisor- We are going to specifically talk about DBP in my particular situation.

Based on the limits set by the IRS there is a way to get to 500K if you are a couple that owns an anesthesia business.

52k Sep IRA + 210k into DBP = 262K for her and 262K for him = 524K as a whole pretax into retirement savings.

... but that's not what we are talking about here. I will get some answers for you as I'm now curious as to what type of DBP my accountant is talking about.

 

[sevoflurane]

I think your accountant is full of it

Look at the table Blade posted above. The annual contribution limit in 2014 to a defined benefit plan is $210,000. There are actuarial determinations made for DBP's but the IRS sets the contribution limit as far as I know.

What the accountant is describing sounds like what the IRS calls an abusive tax transaction or abusive tax shelter scheme.

If you are in a group you can't just start and stop a retirement plan will nilly because it suits you for tax purposes.

I would like to know what type of DBP your accountant is referencing. I am not an expert but it doesn't sound like anything I have ever heard of.

Hey arch, I sent out your question to my accountant yesterday due to my own lack of knowledge. Woke up to find the answer in my inbox this morning.

The long and short of it is that 210K is not the maximum contribution it's the maximum BENEFIT you can get in retirement. In retirement, you can't get a paycheck that will get you more than 210k per year.

Say you have 3 million in liquid assets at the age of 48 (to carry you over until you can access retirement funds) and you want to retire at the age of 52... yet you want to have another 2 million in retirement savings by that time. Apparently, you can fund 500K a year for 4 years to meet your goal of 2 million in a DBP-->so long as your defined benefit doesn't exceed 210K per year once you reach the age where you can start w/drawing.

This is the way I understand it at the present time. I am exploring this option in the future and as such I will be digging a little more into it next month with my financial advisor.

Please object with anything I said as I'm still learning the specifics of a DBP and I'm currently not involved in one.

Cheers.

 

[sevoflurane]

If you look at the table provided by Blade, the DBP line reads as follows:

"Annual BENEFIT limit for DBP".

It does not state annual contribution limits.

Again, DBP are not my area of expertise and would welcome anyone on here to say otherwise.

 

[Arch Guillotti]

Blade's table lists the maximum allowable Benefits/Contributions

This is a short but decent article on defined benefit plans.

I still think the "500K" number is made up.

Charles Schwab offers DBP's.

They don't seem all that expensive.

Account fees and commissions
The following fees apply to the Schwab Personal Defined Benefit Plan:

• Variable fees based on the total number of participants, starting at $1,200 for one person
• Annual service fees based on the total number of participants, starting at $1,200 for one person
• Plan termination fees
• Trade commissions: $8.95 per online trade;1 $0 per Schwab ETF online trade in your Schwab account2

Defined benefit plans can be very complicated and involve intermediaries that are interested in getting some of your money. Your accountant may be the best thing since sliced bread but I would be very careful in setting up a DBP. You may not have control over the investments and you may be subject to significant penalty if you are not fully vested or terminate the plan early.

Perhaps Mman has something to add since he seems familiar with these plans.

Hey arch, I sent out your question to my accountant yesterday due to my own lack of knowledge. Woke up to find the answer in my inbox this morning.

The long and short of it is that 210K is not the maximum contribution it's the maximum BENEFIT you can get in retirement. In retirement, you can't get a paycheck that will get you more than 210k per year.

Say you have 3 million in liquid assets at the age of 48 (to carry you over until you can access retirement funds) and you want to retire at the age of 52... yet you want to have another 2 million in retirement savings by that time. Apparently, you can fund 500K a year for 4 years to meet your goal of 2 million in a DBP-->so long as your defined benefit doesn't exceed 210K per year once you reach the age where you can start w/drawing.

This is the way I understand it at the present time. I am exploring this option in the future and as such I will be digging a little more into it next month with my financial advisor.

Please object with anything I said as I'm still learning the specifics of a DBP and I'm currently not involved in one.

Cheers.

 

[sevoflurane]

Blade's table lists the maximum allowable Benefits/Contributions.
.
This is a short but decent article on defined benefit plans.

I still think the "500K" number is made up.

Charles Schwab offers DBP's.

They don't seem all that expensive..

Account fees and commissions
The following fees apply to the Schwab Personal Defined Benefit Plan:

• 
  
  
  • Variable fees based on the total number of participants, starting at $1,200 for one person
  • Annual service fees based on the total number of participants, starting at $1,200 for one person
  • Plan termination fees
  • Trade commissions: $8.95 per online trade;1 $0 per Schwab ETF online trade in your Schwab account2

Defined benefit plans can be very complicated and involve intermediaries that are interested in getting some of your money. Your accountant may be the best thing since sliced bread but I would be very careful in setting up a DBP. You may not have control over the investments and you may be subject to significant penalty if you are not fully vested or terminate the plan early.

Perhaps Mman has something to add since he seems familiar with these plans..

Yeah there is always someone out there trying to get a piece of our pie. Thanks for the words of caution.

The 500K is a made up number as an example. My understanding is that it can exceed 210K as the 210K is not the contribution but the defined benefit side of the equation.
I think the start up costs are substantially higher than annual fees. Not sure though. I vaguely remember it was 2-4Kish + annual fee.
I'm pretty sure that if you own the company, you do have control over the investments. If you are part of a bigger corporation, then that doesn't apply.

Good discussion. I'm getting something useful out of this part of the thread.

 

[Mman]

I'm not an expert. We have a defined benefit plan. That means the max paycheck you get in retirement is a fixed number (from that plan). It's the annual pretax contribution by you that is variable based on your age and how much you have put in so far. It is completely separate from any 401K or IRA or other retirement savings you may have which is why it can be very helpful to quickly ramp up your savings.