Steven L White

This is not a real Will. It merely suggests what could happen if a business owner does not have a
properly structured and funded succession plan for his or her company. All names referenced are
fictitious and any similarity to any real party or business is merely coincidental.

I , John Smith, presently residing in the State of New York, and part owner of Acme Widget Company, being of sound mind and memory, do hereby declare the following:
1. I hereby leave my interest in my company to my family to be divided among them as they see fit even though my spouse or children have no experience in operating and running a widget company. I have the utmost confidence that after my death, everyone will get along with each other, and that Jack Jones, my partner who owns a portion of the company, will have no problems working with my spouse or children.
2. I hereby leave the responsibility of operating the company to my surviving partner, Jack, whom I am sure, will not mind working twice as hard and sharing all of the profits of the business with my family.
3. In the event my family wants to sell my company to Jack, I hereby leave it up to them to work it out with Jack as to the price and terms of the sale.
4. In the event such a sale takes place and the sales price is paid out over a period of time, I have the utmost confidence that Jack or his estate shall pay my family the terms of the sales contract even if Jack dies or becomes disabled.
5. In the event my family wants to sell my share of the business to an outside party, I hereby direct that they negotiate any terms they want without consulting Jack, and request, but do not demand, that Jack get along with any other new owner of the company.
6. If I have a buy-out agreement with my company or Jack that has not been recently updated, I direct that my family sell my interest in the company at whatever price the old agreement says, even though it won’t reflect current fair market value.
7. In the event Jack or the company has no life insurance on my life, I really don’t care if Jack or the business becomes insolvent and cannot afford to pay my family the buy-out price.
8. I hereby direct the IRS to ascertain the value of my interest for estate tax purposes. I am sure the IRS, as a division of the government, will consider the needs of my family when determining any estate tax attributed to my business holdings.
9. I direct that all lines of credit that my business has at the time of my death be paid off at my death because I think the interests of my lenders are more important than those of my family and my business partner.
10. If I leave my business interest to my family and federal estate tax is due, I know my family will work twice as hard to pay the taxes due to the IRS and any state taxing authority.
11. If all or part of my business interest passes to my minor children upon my death, I direct my children’s guardian or trustee to sell the business as quickly as possible, regardless of price, because I do not want to burden my children’s guardian or trustee with the fiduciary responsibility of running a widget company.
IN WITNESS WHEREOF, I, John Smith, do hereby affirm this to be my wishes with respect to the business I spent
my lifetime building.   

The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment
advice and is provided for general educational purposes only. Neither Guardian, nor its subsidiaries, agents or employees, provide tax
or legal advice. You should consult with your tax and legal advisor regarding your individual situation.

Steven L. White Jr.

After taking the summer off and observing the financial markets of late I am writing new material for the fall that will take us into the New Year. If you have any concerns about the melt-down of the financial markets this week please contact me at your earliest convenience. Thanks for your patience and special thanks to you who have responded to my postings!

Steven L. White Jr.

One of the most important financial decisions that many people make involves the distribution of money from company retirement plans. Most companies don’t want the responsibility of administering accounts for workers who have retired or gone to work elsewhere. Today’s trend is toward “portable pensions” that workers can take with them from job-to-job, so that their retirement plan money can keep growing over whole careers, perhaps across many jobs.

However, many plan participants are not prepared to make the decisions about distributions that are necessary, if they are to achieve personal retirement goals. They don’t understand the choices available, and they may not anticipate decisions and seek professional help before deadlines occur. While this article doesn’t attempt to provide all the knowledge required, it does identify important issues to consider if you are about to receive a distribution.

Six Trigger Events: A good place to start is with the concept of a “trigger event.” This is an event at which your plan money can be distributed to you under federal law. The six trigger events are: 1) separation from service (i.e., quitting, being fired, being offered early retirement); 2) reaching retirement age; 3) reaching age 59 ½ in a plan that allows distributions after that age; 4) death; 5) disability; and 6) termination of the plan.

At a trigger event, participants normally are entitled to receive their vested plan balances, less any plan loans outstanding. For many people, this is the “biggest paycheck” they may ever handle, representing years of personal savings, employer contributions and accumulated earnings. Perhaps the most important point to make about handling a distribution involves the need to anticipate and plan for trigger events. If your company is downsizing and laying off workers, don’t wait for “pink slip day” to seek information or advice. Many other pressures may be swirling around you when the trigger event takes place, and you need time to plan for handling your “biggest paycheck” wisely. One of the first steps in planning for a trigger event is to understand all your choices for handling this money, and then select the best one for your future.

You will probably have several of the following choices for handling this money:

• Leave money in the plan and let it compound. In most cases, you can’t be required to take a distribution, unless your balance is fairly small. However, leaving money in the plan means you will be limited to the plan’s investment choices. You probably won’t be allowed to put more of your own money into the plan after you leave work.

• Take an annuity income payout from the plan, if one is offered. This choice converts plan money into a fixed income guaranteed by an insurance company. However, once you accept this choice, you generally can’t change it. The annuity income may provide less purchasing power the longer you live, because of inflation.

• Pay tax on the distribution and invest or spend the after-tax amounts. This is usually not an attractive choice – especially if your biggest paycheck is large. The distribution will be added to your other income and could be taxed in the highest brackets. If you are under age 59 ½, the distribution also could be subject to a 10% federal tax penalty.

• Transfer the money to the plan of a new employer, if this option is offered. Tax law changes encourage transfers between companies and types of plans. To make this choice work, you generally need to have a new job lined up and take steps to make sure your money is transferred from one plan to another. In this case, you won’t owe current income tax, and all your plan money can continue to grow.

• You can transfer the money directly to a Traditional IRA in your own name, You must arrange this transfer between the company you are leaving and your choice of IRA provider. In this case, you do not actually receive money and there is no current income tax consequence.
 
• You can receive the distribution and then “roll it over” to a Traditional IRA in your own name. You must deposit money into the IRA within 60 days of receipt. The employer will withhold 20% of the distribution for federal income tax, so you will have to supply this amount yourself if you want to avoid tax on 100% of your money. It’s best to avoid the withholding issues of a rollover, if you can.

• You may transfer or roll over money to a Traditional IRA and then convert to a Roth IRA, if you qualify. Roth conversions currently are available to taxpayers with modified Adjusted Gross Income of $100,000 or less. Starting in 2010, the income limit on these conversions is scheduled to disappear. In a Roth conversion, you pay current income tax on the converted amount and then can qualify for tax-free distributions later on.

These choices can be complex to evaluate. With so much money at stake, you need to make sure your analysis is thorough and considers your long-term needs. That’s why it usually pays to sit down with a financial professional well before a trigger event. Many professionals are able to help you understand the tax and investment consequences by using retirement distribution software and customized illustrations. They also can explain other choices you may have. When you consider how long and hard you have worked to earn your biggest paycheck, you should then decide that it’s worthwhile to make the most of it with qualified financial professional help.

Steven L White

Although Roth IRAs have been in existence for several years, they have not been available to many higher-income people due to restrictions imposed by Congress. Under the Tax Increase Prevention and Reconciliation Act, Roth IRA conversions will be allowed for everyone starting in 2010. This change in the law creates a significant planning opportunity for high-income retired people.

To take advantage of this opportunity, individuals can prepare by consolidating all Traditional IRAs into one. Depending on the taxpayer’s Adjusted Gross Income, it also may be possible to begin making annual contributions to a Roth IRA prior to 2010. For reasons discussed in this article, such contributions can accelerate the tax benefits of assets that will be converted from a Traditional to a Roth IRA later.

 There are two main ways to participate in Roth IRAs – annual contributions or conversions. First, annual contributions – Taxpayers whose adjusted gross incomes (AGIs) do not exceed limits may make an annual contribution to a Roth IRA. Contributions are made with after-tax dollars and earnings compound tax-deferred. Withdrawals of Roth contributions may be taken tax-free at any time. Withdrawals of earnings are tax-free, provided the Roth has been in existence at least five years and withdrawals are taken after age 59 ½. Tax penalties apply on withdrawals of earnings prior to age 59 ½ unless an exception applies such as death, disability, medical expenses, first-time home purchase, or higher education expenses.

Secondly, conversions – Currently, any taxpayer (single or joint filer) with AGI under $100,000 may convert money from a Traditional IRA to a Roth IRA. The amount converted is added to taxable income in the year of the conversion and taxed as ordinary income. Since converted amounts then may qualify for tax-free withdrawals under the same terms as Roth contributions, conversions are a way of pre-paying income taxes in an IRA.

Starting in 2010, the $100,000 AGI limit for conversions will no longer apply, according to current law. For conversions made in 2010 only, half of the converted amount may be included in taxable income in each of 2011 and 2012.  
A Roth IRA conversion can help to accumulate tax-advantaged assets during retirement, simplify tax compliance, and pass on estates. In a Traditional IRA, contributions are not allowed after age 70 ½. However, a Roth owner may continue to make post-tax contributions at any age, and this benefit can increase the IRA account value in older ages. As there are no required minimum distributions from Roth IRAs during the owner’s lifetime, a conversion also avoids the annual calculation of the minimum distribution that is required in most Traditional IRAs after age 70 ½.
Finally, since no income tax is due on qualifying distributions from a Roth IRA during the owner’s life or after death, a Roth can make life easier for heirs by leaving them tax-free assets. Although heirs are subject to minimum distribution requirements from Roths (after the owner’s death), they have some flexibility to “stretch” these distributions over several years, thus continuing tax-deferred growth for some time.
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Tax rates can make a difference! One of the more challenging questions to consider is this one: “Do you think that, on the whole, tax rates will increase or decline during your retirement?” Because Roth contributions and conversions effectively pre-pay income taxes, they may make sense for individuals who believe tax rates will increase during their retirements. Some people think it is a mistake to pre-pay taxes because they will lose the “time value of money” on the taxes paid. However, this is not the case, due to the following rule:

A pre-tax dollar in a tax-deferred investment will have exactly the same after-tax future value as a post-tax dollar in a tax-free investment, if you assume that tax rates stay constant.

For example, suppose you put $1 of pre-tax money into a Traditional IRA and over 10 years it compounds (@ 8% annual return) into $2.16. You then pay federal/state income tax at a hypothetical 30% rate, leaving $1.51 after taking a taxable withdrawal. In comparison, suppose that you put 70 cents of post-tax money ($1 less 30 cents tax) into a Roth and it compounds over ten years at the same 8% to produce $1.51. Since the full amount can be withdrawn tax-free, the amount available for retirement security is exactly the same as in the Traditional IRA.

It is impossible to know whether federal, state and local income tax rates will go up or down in the future. Due to this uncertainty, one strategy is to hedge against tax rate changes by dividing retirement money between Traditional and Roth IRAs.

Even for those who aren’t sure about the wisdom of Roth conversions, it can be useful to contribute or convert a small amount to a Roth now. People over age 59 ½ are allowed to take tax-free withdrawals from Roth IRAs starting five years after the account was opened. Even a small amount put into a Roth now starts the “five-year clock” ticking.

In summary Roth IRAs have become a viable planning tool that can help to increase tax-advantaged asset accumulation and increase simplicity during retirement. Recent changes in the tax law will make Roth conversions “universal” starting in 2010, and that makes this a good time to begin evaluating their pros and cons.

Steven L. White

Most people face a variety of unknowns in planning ahead for retirement. They include future inflation, interest rates, medical costs and investment market performance. Also, many of today’s retirees are questioning whether the benefits promised by Social Security and Medicare will materialize years from now. While these issues can determine retirement planning success, the biggest “question mark” of all may be longevity – how long retirement may last.

A good starting point for estimating longevity is a standard life expectancy table. According to these tables, women in the U.S. are outliving men by about 3-4 years on average. For example, a 60-year old woman currently has an average life expectancy of 23.1 years, to about age 83, while an average man of the same age can expect to live another 19.8 years, to about age 80. (This data is drawn from the Social Security Administration’s Period Life Table.)

Life expectancy tables are reliable guides for estimating the average longevity of large populations, but they have a flaw in personal planning. By definition, half of all people will outlive the average, and a small minority will live well beyond the average. For example, for every 100 U.S. women age 60, about 26 will reach age 90; for every 100 men, about 14 will survive to 90, according to Social Security.

Clearly, the retirement planning challenge changes when an individual’s “longevity horizon” shifts from age 80 to 90. If retirement assets and income must stretch a decade longer, the need to make good choices and smart decisions increases, as does the risk of mistakes.

Of course, longevity is determined by more than life expectancy tables and chance. Each person’s profile and lifestyle decisions also influence how long retirement may last. People who don’t smoke, have normal blood pressure, exercise regularly, and are of normal weight stand the best chance of living longer.

The Impact of Inflation on a Fixed Income-An important goal of retirement planning is to avoid depleting assets or running short of income in old age. If retirement planning decisions are based on an average life expectancy, individuals have a 50% chance of outliving their money. A more conservative approach is to plan for a retirement that will last several years beyond average life expectancy. Of course, the longer a retirement lasts, the greater impact inflation may have on the purchasing power of a fixed income. The table below shows the probability of living from age 60 to various ages and also the reduction in purchasing power for each dollar of fixed income that starts at age 60. It assumes that inflation averages a constant 3.5% in retirement, using $100 in this examply.
 
  Male      Female 
70 82.6%   88.6%    $70.89
75 68.8%   78.6%    $59.69
80 51.5%   64.9%   $50.26
85 32.1%   46.8%   $42.31
90 14.5%   26.3%   $35.63
95 3.9%      9.7%     $30.00
100 0.5%    1.9%    $25.26
Source: Social Security Period Life Table updated 6/27/06. Social Security Administration.
 
Income Sources That Can Last a Lifetime-Fortunately, it is possible to build retirement security on a base of income sources that can last a lifetime. These sources can form a foundation of longevity planning, especially for individuals who believe they may live well beyond an average life expectancy:

• Social Security – Under current law, Social Security retirement benefits will be paid for life to covered workers and their spouses. But changes in the Social Security system are probable in the years ahead, and it is not yet clear how retired people will be affected. Until changes are resolved, it may not be prudent not to count on Social Security for most of lifetime financial security.

• Pensions – In the past, many employers have paid lifetime pensions to workers and their spouses. But pensions have lost favor in recent years as more companies have shifted to personally-funded retirement plans, such as 401(k)s.

• Guaranteed Income Annuities – Life insurance companies offer guaranteed income streams payable for life, and the income can include annual increases that help to offset inflation. Because income annuity decisions may be irrevocable, it’s wise to compare the choices carefully with professional help.

In summary, it is possible to factor personal heredity and healthy living habits into your retirement outlook, along with a desire to plan for a period of time somewhat greater than average life expectancy. In this process, a qualified financial professional with experience in retirement issues and exit planning  can be a valuable resource.

Steven L White Jr

When you’re young and just starting to make money, the last thing you may want to think about is retirement. But in reality, there is no better time than a first job to start setting money aside systematically in a retirement plan. It’s not critically important how much money you save in an IRA, 401(k) or other type of plan. What really matters is that you start a retirement plan savings habit as soon as possible and keep investing in it persistently. In this article, I’ll suggest six reasons why this is one of the smartest financial decisions a young person can make.

Reason #1 – The Power of Tax-Deferred Compounding
If you are 25 years old, you might not think it matters much whether you start saving now or next year. But by the time you reach retirement age, the cost of procrastination can be huge. For example, a 25-year-old person who sets aside $2,000 per year in an IRA and earns a 7% return will hypothetically build a nest egg of $427,219 by age 65. But if this person delays starting the program by just one year, it will be worth about $30,000 less. According to the Bureau of Statistics’ current data, today’s average person who reaches retirement age can expect to live to age 86, and life expectancies keep increasing for each generation. So, by procrastinating now, you possibly risk reducing your standard of living for the last 25-30 years of your life. In a retirement plan, money can compound on a tax-deferred basis without any current income tax consequences. That’s an attractive tax situation for socking money away long-term.

Reason #2 – It Doesn’t Cost a Dollar to Save a Dollar
Do you worry that you can’t afford to save $100 per month in a retirement plan, because you need to spend the money on something else? The truth is  – it won’t cost you as much out-of-pocket as you save, because you may qualify to receive a current tax break for money contributed to a Traditional IRA or 401(k). For example, suppose you pay federal and state income tax at a combined rate of 30%. If you put $1,000 into a Traditional IRA and qualify for a tax adjustment, you will be allowed to reduce your taxable income by the same amount, resulting in $300 less tax paid.

Reason #3 – Matching Is Powerful
Some employers will match a portion of the money their workers defer into their own plans. For example, suppose that your company will match some of the money you defer into your 401(k) on a 50% basis. If you put in $100, your employer matches with another $50. Although it may take several years for employer matching money to “vest” so that it becomes yours, this is like getting a quick 50% return on your savings. Also, you begin to build compound earnings on the whole amount – your $100 plus your employer’s $50. If your company offers matching, this is a powerful reason to start saving now.

Reason #4 – “Government Matching”
It’s not just your employer that may match your own plan money. The federal government may “match” a portion of your plan contributions with a tax credit. Depending on your income, the credit can be as high as 50% of the first $2,000 you put into a Traditional or Roth IRA, 401(k), 403(b), SIMPLE or other type of plan. The largest credit (50%) is available to single filers up to $15,000 of Adjusted Gross Income and joint filers up to $30,000. Lesser credits are available to single filers up to $25,000 and joint filers to $50,000. Suppose that you participate in a plan where your contributions are matched 50% by your employer, and you also qualify for a 20% “government matching” credit through 2006. That means – every dollar of your own money that goes into the plan is matched by an immediate return of 70 cents. Where else can your money work that hard?

Reason #5 – Social Security Is Iffy
For any person in the U.S. who is age 40 or less, the outlook for Social Security retirement benefits is not rosy. For starters, you won’t reach Normal Retirement Age and qualify for full benefits until age 67 under current law, and that could go higher. Then, consider the burden millions of aging Baby Boomers will place on the system as they start to retire. According to the Social Security Administration, today there are about 3.4 active workers for every retired Social Security beneficiary. By the middle of this century, Social Security estimates that ratio will drop to about 2 workers per beneficiary. Recently, the Social Security Trustees reported that the outgo for Social Security retirement benefits will start to exceed income in 2017 and the trust fund will be exhausted by 2041 unless major changes are made. If you don’t start planning for your own retirement now, you may be left out in the cold later.

Reason #6 – Habits Are Hard to Break
At first, it can be tough to live on less current income every month, because you are taking care of your retirement plan first. But after a few months, you won’t even miss the money. Putting money into your retirement plan steadily regularly is one of the best financial habits any person can start at a young age. Don’t be afraid to talk to a financial professional about the best way to set up your retirement plan savings program and its investment strategy. You can start your savings habit without having to make the investment decisions alone.

Note: My figures quoted are for illustrative purposes only and are not indicative of a specific result that may be obtained on any particular investment. They do not include consideration of the time value of money, inflation, and fluctuation in principal or in many instances, taxes.

Steven L. White Jr

I recently attended a special event sponsored by an organization that supports and mentors emerging business owners and entrpenuers. What made the evening extra special is that I was introduced to an aspiring young man who began  a hobby that turned into a flourishing and very profitable business. I was truly inspired and impressed by this young man who managed to grow a business to such respectable revenues and incredible profitability! He attended the event because he is has maxed out his abilities to keep pace with purchase orders and is unable to expand into additional products due to time constraints. 

After listening to him talk about his situation a group of qualified professionals at the table offered a variety of recommendations as to how he could solve these problems being -how he could locate hire and train additional staff to keep pace with production and roll out new product.  What jumped off of the table as we conversed was what this young man needs to do before he hires anyone.  If you have found yourself in this position consider but do not limit your self to the following steps and take immediate action. “Protect” first! My legal friends may recommend an analysis of your Intellectual property-your trade name, your branding, entity election, anything that identifies your product or service that is not legally protected from some one else to use. An attorney may also suggest a review of your liability insurance and any state and federal equal opportunity guidelines, do’s and don’ts about hiring, corporate by-laws, resolutions and board selection. It may make sense to consult with a human resource company such as a Professional Employment Organization (PEO). An attorney may also suggest
 
A property and casualty insurance person may suggest that you take inventory of your auto, home and umbrella policies. Do you have enough coverage, is it enough and are your personal assets protected from suit?  A life insurance representative may suggest evaluating your personal life insurance portfolio, Your businessKey man  portfolio or any long term disability and medical coverage. These are your first and second lines of asset protection strategies. Remember,  without a qualified sick pay plan the Internal Revenue Code does not allow your company to compensate you if are not able to work due to injury or illness.

Income-The earned income and dividends this persons business is producing may justify setting up a qualified plan for the ownership and qualifying employees. There are several to choose from and a feasibility study would be the proper approach to determine what type of qualified plan is suitable. It may make sense to evaluate a Non-qualified deferred compensation strategy as well for key officers or shareholders of the company. Using post tax dollars as part of an accumulation strategy can help mitigate the future-unknown tax environments. 
Key man insurance and income protection-There are various types of life insurance that this person could evaluate.  My recommendation would be to evaluate a permanent life insurance strategy that may include convertible term.
 Protecting income from a long term disability is paramount! A significant amount of bankruptcies and foreclosures are caused by lack of income due to injury and illness.

 Your income provides you with money to live a life, pay your bills, and create a lifestyle. Without income how would you live? I recommend choosing an “own occupation” long term disability contract with future increase options and cost of living rider to help keep pace with inflation. I may also recommend business overhead protection that pays the bills and payroll for the company as well. These are just a few suggestions of many, that successful business owners can put in play to protect, preserve and grow  his or her company. As always, consult with qualified professionals before implementing any financial or non financial strategy.

Steven L White

When is the last time you have given your retirement strategy a closer look?

401(k), IRA, SEP, SIMPLE, what does it all mean? Have you maxed out your contributions? Does make sense to max out your contributions? Is the maximum contribution going to provide you with the quality of retirement that you want?

When is the last time you used a future value calculator to see what your retirement account might look like in 10, 15, 20 years? In evaluating your future needs, did you take into account inflation and Income or capital gains taxes? Do you really think that you will retire in a lower tax bracket? How about life events? Did you build a model that took into account a long term care event?  How about a full disability that cuts off your gravy-train income? How about an estate with no life insurance? I don’t know what the years ahead of me will look like no more than the next person. What I do know is that I want my financial strategy to work under all foreseeable circumstances. I want it to work today and in the future. In most cases a single strategy of having all of your eggs in the retirement basket underperforms. Now add in being in the wrong retirement plan for a long period of time and you have compounded the problem. We live in a society that dispenses financial information like candy in a candy store. Yet with all of this information the statistics show that most people are in a financial struggle.

I do believe that there are 3 options in life that we choose when making decisions about our money, One-do nothing, two-do what everyone else is doing (herd) and then there is the Third Option. The Third option is the best option because it helps you understand the truth about money. It helps you understand how to become successful with your finances by understanding the hierarchal order of money…protection, savings and growth. The Third option helps you understand your cash flow deployment and how to structure it so that you achieve maximum efficiency that produces maximum benefits. The Third Option teaches you about rate of return in the asset and liability column. The Third Option helps you create and structure a financial strategy that helps protect against market risk, inflation risk, legislative risk and enormous tax liabilities. Wouldn’t you like to know when it makes sense to form an Irrevocable Life Insurance Trust? How about a Charitable Remainder Trust?  How about knowing when to exercise your gifting strategy to help mitigate estate taxes?

The Third Option is about you having a team of advisors that are ALL on the same page when it comes to your personal estate, your business and medical practice. Think of what you can do now!

Steven L. White

Starting off the year with a clearly defined set of financial goals is easy. Following through those goals is sometimes like trying to wrestle a greased up watermelon with one arm tied behind your back. Life and business can get real busy real quick and by the time you catch your breath it’s July 4^th. Like you, I have never been able to find the “Silver bullet” but I do know what other professionals have done to grind out. Simply put, just do it. Start by breaking down the financial goals into three primary categories, protection, savings and growth. Be sure to separate your goals into “Business” and “Personal” since the success of each is dependent upon the other. List your goals from the hardest to easiest or the most time consuming to least time consuming. I like this order because it puts the most important and labor intensive first. Get these done and the rest is as cake walk!  

I’d like to make a few suggestions for you. In the personal category in your protection room, start by a comprehensive review of your wills and trusts. Chances are these documents are out of date and will not perform to expectations should something happen to you, your spouse or partner. In the business category take a look at your buy-sell agreements. Are they properly funded with the right kind of insurance? Are they up to date to cover all of the key partners of the firm? While you are there how about the executive benefits program that you have always wanted to implement? Then look at your entity planning. Is your LLC, S-corporation or C-corporation still the best and most efficient corporate structure for your business or medical practice? Will you pass the IRS sniff test of these entities? How about your exit strategy! How do you want your succession plan to play out? It’s a wonder why we put these things off until the last minute! 401(k), IRA, SEP’s, life insurance, retirement plans, and business agreements oh the list is endless. So many moving parts, so little time.  

At the end of the day, breaking your financial goals into smaller pieces, putting a time stamp on them and following through is the most powerful approach to getting things done and done the right way. How ever you do it, be sure to add in the “fun factor”. It’s makes world of difference. If you would like help reviewing your wills, trust and corporate agreements give me a call. I will be glad to get you in front of well qualified professionals that will offer these reviews at no cost to you or your company.  

Steven L. White 

A couple months ago I introduced you to the Internal Revenue Code 412(i) qualified defined benefit retirement plan. Remember that this retirement strategy allows you to define your retirement benefit with a fully insured plan. This fully insured plan also allows you to defer income significantly above the typical $45,000 plus catch up provisions for defined contribution plans.  Remember these plans are funded with life insurance and annuities and typically tailored for high income wage earners with shorter retirement time horizons. For example, someone in their late 40’s, 50’s or 60’s. (younger folks who qualify must of course be included in these retirement plans). I thought it would be a great idea to show you a “sample” case study so that you can compare and contrast the difference between a Defined Contribution Plan and the fully insured Defined Benefit Plan IRC 412(i) which will become  IRC 412(e)3 effective in 2008. 

First the set up:  The Participant is a family doctor, male, mid 50’s. He has 3 participating employees with ages ranging from 23 to 40 and average compensation of $37,000 per year. The Doctor has an income tax burden of $200,000 for 2007. (He’s not real excited about this.) The doctor’s income is extremely stable and he plans to retire in 12 years.   

Present situation: The doctor is contributing to a Defined Contribution Plan  401(k) account to the maximum of $45,000. In this example the Doctor will have accumulated $1,600,000 by the end of 12 years. Over the same period of time the doctor will pay Uncle Sam $2,400,000 in income taxes. ($200,000 x12 =$2,400,000). He is not happy about that either. Now let’s spend it down at retirement. Let’s pretend the doctor takes $150,000 per year from his 401(k) retirement plan and it continues to grow at a rate of 5% per year. In 9 to 12 years it is possible that he runs out of money if we factor current rates of inflation, current interest rates and existing tax brackets.  

Contrast this to Future situation: The doctor decides to create a Defined Benefit Plan under IRC 412(i). In this example let’s use the same numbers as above however let’s shift the tides a bit. Let’s take the $200,000 and pay $170,000 to “himself” as a contribution into the plan. In this example his tax liability has been reduced by approximately $27,000 from $200,000. Assumption is that the doctor’s taxable income places him in the 28% tax bracket of the current tax code. This results in the doctor recapturing approximately $2,000,000 over the next 12 years and he is extremely happy with this. He is even more excited that his deductible contribution to his retirement plan jumped from $44,000 with the defined contribution /401(k) to $170,000 per year contributions made by him on behalf of his employees would of course also be deductible! In this example the doctor is able to accumulate approximately $3.1 million of guaranteed money inside his plan (subject to some market risk)   which will pay out a guaranteed retirement income of $175,000 (2006 limits) per year until death. This is a much better outcome than running out of income using the 401(k) strategy. 

Remember, IRC 412(i) allows the lesser of 100% or salary or $180,000 for 2007 as retirement benefit.  You can not ignore the possibility of a 412(i) plan as a viable alternative to your current tax and retirement strategy.  As always be sure to consult with your highly qualified, credentialed tax professional when addressing and gaining an understanding of the Internal Revenue Code before making any decisions.   

Steven L White

Park Avenue Securities LLC,(PAS) and its representatives do not give tax or legal advice