Nyhart - Customized Retirement Plan Design Study

Retirement Links

Businesses that meet one or more of the following criteria tend to benefit the most from the design of customized qualified retirement plans:

business owner(s) has not yet met his/her retirement income goals;
business owner(s) has significant wealth tied up in his/her business;
business owner(s) consistently earns high levels of income;
business owner(s) is older than the majority of his/her employees.

Retirement Plan Design Study

Retirement Planning – Do You Prefer Simple or Valuable?

Many small business owners are missing out on the huge benefits available to those that provide customized qualified retirement plans. Qualified retirement plans allow employers to make contributions to them on a tax-deductible basis. Participants are not taxed on those contributions or the investment earnings on them until the money is distributed. There is a wide spectrum of qualified retirement plans available.

Simplified Employee Pension (SEP)

An SEP design allows an employer to contribute up to $44,000 (but no more than 25% of pay) per year into individual IRA’s set up for himself and each employee. However, the contributions for all employees must be uniform, e.g. the same percent of pay, and is often cost-prohibitive.

401(k) Plan

allows all employees, including the owner, to contribute $15,000 per year on a pre-tax basis. For participants age 50 or older, that limit is increased to $20,000. Compared to other viable options, 401(k) limits are quite low. Thus, these plans generally are not sufficient enough to meet retirement savings goals by themselves.

401(k) Plan with Profit Sharing Contributions

This design allows an additional annual amount of $29,000 (for a total of $44,000) to be contributed on one participant’s behalf, nearly tripling the participant’s projected retirement plan value. In a profit sharing plan, the employer contributions for all employees are not required to be uniform. In order to receive favorable tax treatment several requirements must be met with regard to the employees covered by the plan, and the allocation of contributions between employees, but, the benefits provided are not required to be uniform.

Defined Benefit Pension Plan

DB Pension plans allow more substantial benefits than any of the plans above, especially for older owners/employees. Combining a defined benefit pension plan with a profit sharing plan can dramatically increase the annual amount by approximately $50,000 more for those not yet near retirement to over $150,000 for those nearing retirement. If designed appropriately, these large contributions can also be made on a tax-deductible basis.

How can you determine if a customized plan would work for you?

It's simple, fill out our online worksheet - submit basic census information on your employees (pay, birth date, hire date, etc.). At no cost, ABG of Indiana will design a number of alternative retirement plans that maximize retirement benefits to the owner(s) at a minimum contribution level.

Some of the benefits happen now while some will be enjoyed in the future. They include:

significant retirement income (up to $175,000 per year from a defined benefit plan alone) for the lifetime of the owner and his/her spouse;
much higher current income tax deductions;
some financial security provided to employees to help them meet their retirement income needs;
can serve as a transition tool in succession planning with the new owner(s);
lifetime annuity can simplify estate planning and reduce estate taxes.

Simplified Employee Pensions (SEPs) and 401(k) plans certainly can help prepare you financially for retirement. However, without help from a more powerful option, they will likely fall short of the desired retirement income goals. Customized profit sharing and defined benefit plans are not simple, but when it comes time to retire, do you want a plan that is simple or a plan that is valuable?

A Member of Alliance Benefit Group