Minimum age to contribute to defined benefits plan?

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B52slinger

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Can a 30 year old contribute 150k/year pre-tax to a defined benefits plan as a 1099 contractor? Is this allowed?

This would allow for outrageous tax savings.
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B52slinger said:
Can a 30 year old contribute 150k/year pre-tax to a defined benefits plan as a 1099 contractor? Is this allowed?

This would allow for outrageous tax savings.
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I’ve never done this as a 1099, but my old group DBP required actuarial oversight that set the contribution limits. Max for a 30yo would have been like 20-30k.
 
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coffeebythelake said:
So the "pro" is a significant pre-tax contribution and less taxable income.
Why don't more employers offer this sort of plan? What is the drawback of doing this?
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A defined benefit plan is essentially a pension plan and guarantees a defined amount/rate of return, regardless of how much money/securities the plan actually has. Thus in bad markets it can be risky for the owners if their liabilities greatly exceed assets and people start pulling money out. For employed docs, the employer is on the hook for any shortfall in a defined benefit plan. So if you promised a 4% return and someone retired and had a defined benefit of $200,000 but their contributions had only grown to $150,000, the employer has to pay the extra $50,000. That’s fine if you’re 1099 and have to write a check to yourself, it’s quite another if you’re an employer and you have to cover a shortfall in the millions for a group because of bad investments, low treasury rates, etc. So big employers hate them but small traditional partnership groups typically had them since the partners would pay themselves the shortfall if they occurred.
 
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ambiturner said:
A defined benefit plan is essentially a pension plan and guarantees a defined amount/rate of return, regardless of how much money/securities the plan actually has. Thus in bad markets it can be risky for the owners if their liabilities greatly exceed assets and people start pulling money out. For employed docs, the employer is on the hook for any shortfall in a defined benefit plan. So if you promised a 4% return and someone retired and had a defined benefit of $200,000 but their contributions had only grown to $150,000, the employer has to pay the extra $50,000. That’s fine if you’re 1099 and have to write a check to yourself, it’s quite another if you’re an employer and you have to cover a shortfall in the millions for a group because of bad investments, low treasury rates, etc. So big employers hate them but small traditional partnership groups typically had them since the partners would pay themselves the shortfall if they occurred.
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The plan is created with an acturary... Are the investment rate of returns generally lower and more conservative than say putting the money in sp500? Who gets to pick what the investments are? If you did this as a 1099 are you basically stuck for the rest of your career contributing even if you switch jobs or decide to go w2?
 
ambiturner said:
A defined benefit plan is essentially a pension plan and guarantees a defined amount/rate of return, regardless of how much money/securities the plan actually has. Thus in bad markets it can be risky for the owners if their liabilities greatly exceed assets and people start pulling money out. For employed docs, the employer is on the hook for any shortfall in a defined benefit plan. So if you promised a 4% return and someone retired and had a defined benefit of $200,000 but their contributions had only grown to $150,000, the employer has to pay the extra $50,000. That’s fine if you’re 1099 and have to write a check to yourself, it’s quite another if you’re an employer and you have to cover a shortfall in the millions for a group because of bad investments, low treasury rates, etc. So big employers hate them but small traditional partnership groups typically had them since the partners would pay themselves the shortfall if they occurred.
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Nobody takes the pension payout. You retire and roll it over and invest it how you want. Anyways you can't just start pulling money out because you feel like it. You are obligated to make contributions.
 
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coffeebythelake said:
The plan is created with an acturary... Are the investment rate of returns generally lower and more conservative than say putting the money in sp500? Who gets to pick what the investments are? If you did this as a 1099 are you basically stuck for the rest of your career contributing even if you switch jobs or decide to go w2?
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It is more conservative. Our group has one. Usually invest in less volatile options like bonds. Can expect a 4 percent return. No stocks. The benefit is that it is tax deferred and you can put large amounts a year( ie 150 k a year ) as you get closer to retirement.
 
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Simba1711 said:
It is more conservative. Our group has one. Usually invest in less volatile options like bonds. Can expect a 4 percent return. No stocks. The benefit is that it is tax deferred and you can put large amounts a year( ie 150 k a year ) as you get closer to retirement.
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Is this something worth doing early/mid career, or is this something more beneficial for late career physicians closer to retirement?
 
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coffeebythelake said:
Is this something worth doing early/mid career, or is this something more beneficial for late career physicians closer to retirement?
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I think it is better for late career because early career physicians tend to have a lot of expenses such as children and houses
 
Arch Guillotti said:
Nobody takes the pension payout. You retire and roll it over and invest it how you want. Anyways you can't just start pulling money out because you feel like it. You are obligated to make contributions.
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when you roll over the pretax contributions from this, do you have to pay taxes to do so as "ordinary income"?
or do you roll it into another pre-tax account and "invest it how you want"?
 
Arch Guillotti said:
Nobody takes the pension payout. You retire and roll it over and invest it how you want. Anyways you can't just start pulling money out because you feel like it. You are obligated to make contributions.
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My old group would close their plan every 5ish years and everyone would roll into an IRA, so big pull outs were always around the corner. If the plan was short money, which never happened, the partners would have had to make up the difference at that time.
 
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ambiturner said:
My old group would close their plan every 5ish years and everyone would roll into an IRA, so big pull outs were always around the corner. If the plan was short money, which never happened, the partners would have had to make up the difference at that time.
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Is that allowed? Seems fishy. Like a backdoor way to do mega contributions to a pre tax IRA
 
Yeah the above sounds shady. I know if you leave the employer you are allowed to roll over into an ira. Tbh I’m not sure if it’s beneficial for early or later age. The tax savings are enormous as it’s tax deferred and you can put a large amount of money away. The cons are that it’s low yield and you have to make up the difference if it underperforms. It may be more beneficial to put in index funds at an earlier age. I have to calculate and discuss with other people before I opt in. I’m leaning towards putting a small amount early ( putting a lower percentage than the max each year) and being more aggressive as I get older. Another con is that you can only change the contribution amount at certain intervals.
 
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coffeebythelake said:
Is that allowed? Seems fishy. Like a backdoor way to do mega contributions to a pre tax IRA
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It's definitely allowed. WCI talks about it plenty on his blog. You may choose to close the plan because you found a better one or a better deal with another issuer, and doing so allows all the partners to do a big rollover.

Whether that's the actual reason for closing the plan or not is irrelevant in my mind. Point is you are allowed to do it.
Screenshot_20230419-073152.jpg
 
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moving money in one pre-tax area to another pre-tax area (with considerably lower fees and more control of investments) doesn't seem shady at all to me. it's still pre-tax money meaning you still have to confront the taxation issue at some point. what would seem shady would be transferring that bucket of pre-tax money somehow into a post-tax bucket. but I think that is allowable if you rollover a closing DBP account into a pre-tax IRA, and move that money into a Roth account in low earning years. you'll still pay income tax on the transfer, but if your income is low enough the taxation could be considerably lower than if you transferred it into a Roth in high earning years, or left it in a pre-tax IRA and that account value became high enough that your income in retirement is effectively no different than in your working years.

regardless, I think DBP plans are smart and a lot more of a legal way to reduce taxable income than some of the 1099 income/deducted expenses posts I've been reading here.
 
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Simba1711 said:
Yeah the above sounds shady. I know if you leave the employer you are allowed to roll over into an ira. Tbh I’m not sure if it’s beneficial for early or later age. The tax savings are enormous as it’s tax deferred and you can put a large amount of money away. The cons are that it’s low yield and you have to make up the difference if it underperforms. It may be more beneficial to put in index funds at an earlier age. I have to calculate and discuss with other people before I opt in. I’m leaning towards putting a small amount early ( putting a lower percentage than the max each year) and being more aggressive as I get older. Another con is that you can only change the contribution amount at certain intervals.
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I think it’s beneficial for the older partner who has undersaved for retirement but has a few working years left. I also think it’s beneficial for early/mid career folks who plan to slow down late in career and can transfer some of those pre tax dollars into a Roth account in their low earning years.

To be clear, it is the employer and not employee that makes up the difference between declared return (4% for example) and actual return in low return or negative return market years. I think you get that but wanted it to be clear.
 
Lecithin5 said:
Really? Any idea how much?
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$3.4 million is the current maximum lifetime contribution limit. Not a bad chunk of change. I just started contributing to a DBP because Optum bought out our multi specialty group and then cut out the Anesthesia Dept. Best thing to ever happen to me because senior shareholders got a nice payout and we went from W-2 to 1099 while still working at the same community hospital.
 
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Most DBP administrators take about 1% management fee annually because of the active management and actuarial work. It’ll typically drop once you reach a certain amount (say 2.5m). Would love to see the calculation of how that works out in the end when you add in tax benefits, versus just doing that yourself into indexes/CDs/MM. I know that 1% is massive over time and have seen all those projections, but how does it compare once you put in the tax implications annually.
 
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CubsDynasty said:
Most DBP administrators take about 1% management fee annually because of the active management and actuarial work. It’ll typically drop once you reach a certain amount (say 2.5m). Would love to see the calculation of how that works out in the end when you add in tax benefits, versus just doing that yourself into indexes/CDs/MM. I know that 1% is massive over time and have seen all those projections, but how does it compare once you put in the tax implications annually.
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My DBP admin charged $1800 for the first time set up and roughly $1000 per year afterwards . Then I choose my own passive index funds from Fidelity. I put away roughly $130,000 per year into my DBP. My problem was getting someone at Fidelity to find the right investment vehicle for my DBP when I was setting it up. 7 out of 8 people knew nothing about DBP at Fidelity . It’s called an Investment-only retirement account for small businesses. You need to fill out this application in order to set up a DBP through Fidelity correctly.
 
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CubsDynasty said:
Wow I spoke to the wrong people, will look into it more now
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What I hate is all the people from Fidelity and Bank of America (Merrill Lynch) who keep on telling me that I need a Financial Advisor and that they would get me better returns….. at a 1% per year. That’s $10,000 per million per year!!!! I always saw no thanks!
 
drfeelgood said:
My DBP admin charged $1800 for the first time set up and roughly $1000 per year afterwards . Then I choose my own passive index funds from Fidelity. I put away roughly $130,000 per year into my DBP. My problem was getting someone at Fidelity to find the right investment vehicle for my DBP when I was setting it up. 7 out of 8 people knew nothing about DBP at Fidelity . It’s called an Investment-only retirement account for small businesses. You need to fill out this application in order to set up a DBP through Fidelity correctly.
Click to expand...

What a scam. Fidelity is such a useless company. The last time I made an account with them they had two people tell me that the type of account I was trying to make (non-prototype account) doesn't exist and they can't make it for me. One guy literally said to me "You're a doctor so you should focus on doing doctor things and I'll focus on doing investment things".

But actually it did exist so...
 
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