Retirement Planning

Retirement planning deals with helping businesses and individuals find retirement solutions for themselves and their employees.

I. Introduction to Retirement Planning

When creating a Retirement Plan for a client, the retirement needs must be analyzed and assumptions have to be made to plan for the future.

General Assumptions for a Retirement Plan

  • Inflation
  • Retirement Period and Life Expectancy
  • Lifestyle
  • Total Income
  • Investment Returns
  • Savings Rate

Income Sources

Financial Needs

  • Living Costs
  • Charitable & Beneficiary Gifting Objectives
  • Other

Types of Qualified Plans:

  1. Defined Benefit Pension
  2. Cash Balance Pension
  3. Target Benefit Pension
  4. Money Purchase Pension
  5. Profit Sharing
  6. Stock Bonus
  7. 401(k) Traditional and Roth
  8. Thrift
  9. Age Based Profit Sharing
  10. ESOP
  11. SIMPLE 401(k) Plan

Plans where the employee contributes: 5,7,8, and 10
Plans where funding is mandatory by employer: 1,2,3, and 4
Plans where the employER bears investment risk: 1 and 2
Plans where the employEE bears investment risk: 3,4,5,6,7,8,9, and 10
Plans where it favors older employees: 1,3, and 9
Plans where it favors younger employees: 2,4,5,7, and 8
Plans where it favors highly compensated: 6 and 10
Defined contribution plans: 3, 4, 5, 6, 7, 8, 9, 10, 11
Defined benefit plans: 1, 2

Retirement Plan Limits (2015)

  • Defined Benefit Maximum: $210,000
  • Defined Contribution Plan Maximum:
    • Dollar Limit: $53,000
    • Percentage Limit of Employee's Compensation - 100%
  • SEP Earnings Eligibility - 408(k)(2)(c): $600
  • 401(k), SARSEP, 457, 403(b) Employee Deferral Limit - $18,000
  • IRA Contribution Limit: $5,500
  • SIMPLE Employee Deferral Limit: $12,500
  • Catch-Up Provision (Age 50 and Older)
    • IRA: $1,000
    • 401(k), SARSEP, 457, 403(b): $5,500
    • SIMPLE: $2,500
  • Highly Compensated (HC) Employee - 414(q): $120,000
  • Key Employee - 416(i): $170,000
  • Covered Compensation for Qualified Plans: $265,000
  • Traditional IRA Contribution Phaseouts
    • Married Family Jointly Filing - Taxpayer is active participant: $98,000 to $118,000

II. Qualified Pension Plans

Money Purchase Pension Plan

Employer is required to make a contribution on behalf of each employee, in an amount determined by the contribution formula stipulated in the plan.

An employer may deduct contributions up to 25% of a participant payroll. Only up to $260,000 of an employee's compensation may be considered. (2015) The employer must contribute the amount determined in accordance with the plan's contribution formula regardless of a profit or loss for the company that year.

Target Benefit Pension Plan

This plan is a defined contribution plan that technically combines the characteristics of a defined contribution and defined benefit plan. The employer is required to make a contribution based upon total compensation, but contributions are allocated to each participant account calculated by an actuary who takes the participant's age and compensation in consideration.

III. Profit Sharing Plans

When an employer creates a profit sharing plan, the employer is committing to make contributions only at the discretion of the employer. Even though the employer is required to make substantial and consistent contributions to the profit sharing plan, the contributions can change from year to year and may even be eliminated in some years.

Contribute by Percentage vs by Benefit

By Percentage

If a plan specifically indicates that the employer will contribute a percentage of each employee's compensation, then this would make the plan a defined contribution plan.

By Benefit

If the plan specifically indicates the amount of benefits that must be paid at retirement, then an actuary must determine the annual contributions necessary to provide the benefit.

401(k) Plans

Also known as a "cash or deferred arrangement" or CODA, a 401(k) plan is a qualified profit sharing plan. In some cases a 401(k) plan can be a stock bonus plan as well. The plan consists of participants, who are the employees of the company's plan, and the plan sponsor which is the company or employer.

Participants are employees who voluntarily participate in the employer sponsored 401(k) plan. The company cannot force an employee to invest their wages in to a 401(k), but give the option to the employee to put their earned wages in to the 401(k) plan.

You might ask why would anyone want to put money in a 401(k) instead of a savings account or a regular investing account.

Advantages of a 401(k) Plan:

  • Employees are permitted to shelter current income from taxation in a 401(k) plan

This is a big benefit. Imagine earning $100,000 of income with an income tax rate of 25%. You would really be earning $75,000 after taxes. Now figure this, your company sponsors a 401(k) plan where you decide it would be a great idea to put $10,000 into. This would deduct your $100,000 of earned income to $90,000 because of this shelter benefit. Now you would only pay $22,500 in taxes instead of the full $25,000.

$25,000 - $22,500 = $2,500 in less taxes by saving for YOUR retirement!

  • Earnings grow tax-deferred until distributed
  • Employers can establish 401(k) plans with minimal expense
  • Employers sponsoring the plan can claim the annual contributions as current deductible expenses
  • Benefits are protected from creditors of the employer or employee

IV. Stock Bonus Plans and Employee Stock Ownership Plans (ESOP)

+++*Intro to Stock Bonus Plans & ESOPs

These plans are tax qualified employer plans where participants, which are the employees of the company, have their retirement accounts invested in stock of the sponsoring company or the employer.

V. Distribution from Qualified Plans

Creation, Administration, and Termination of Qualified Plans

A qualified plan may be amended or terminated if:

  • To maximize benefits to key employees
  • A law change took place
  • Employer can no longer fund the plan
  • Benefits are not meeting employee needs

The following issues should be considered when selecting a qualified plan:

  • Only those issues that relate to the business/owner, the employees
  • It should be only based on financial issues

VI. Individual Retirement Accounts (IRAs) and Simplified Employee Pension Plan (SEP)

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VII. SIMPLE, 403(b), and 457 Plans

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VIII. Social Security

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IX. Deferred Compensation and Non Qualified Plans

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