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Suitability of Schwab Personal Defined Benefit Plan

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  • Avatar MTL 
    Participant
    Status: Physician
    Posts: 4
    Joined: 06/07/2019

    I would like the forum members recommendation whether I should proceed with setting up a solo personal Defined Benefit plan for my spouse’s 1099 income of 175,000$. His income is discretionary . My high income covers all our expenses.  His age is 45. Likely to retire in 6-10 yrs
    He currently has solo401k where he contributes ( 19K employee contribution + 27k 20% business profit ). we contribute the remainder of his income into taxable account

    . We are considering the Schwab Defined benefit plan to allow greater tax deferred contributions than the current solo 401k. The schwab plan proposal which we received done with actuarial analysis indicate 1.4 million dollar benefit at a retirement age of 55, with average contribution of 74K$ per year. He still gets to contribute 19k for the employee portion of his solo 401k.

    So 74K pretax in defined benefit plan vs  current 27k employer/profit sharing contribution in solo 401k

    Our intention is to run the plan for 6-8 years and then terminate plan upon retirement  and roll assets into solo401k

    The Schwab plan proposal has a interest crediting rate of 3.93%%. Our plan is to invest the contributions in a Total Bond Index fund which would fit into our asset allocation plan across our overall portfolio. This would also prevent overfunding or high volatility in the defined benefit plan.We use taxable accounts for our stock portion of our portfolio

    Currently we are at the 35% marginal tax rate. Our hope is that when we withdraw money from the tax deferred accounts we will be in lower tax rate.
    In retirement we anticipate a spending level of 140,000$ per year to be with drawn from a combination of taxable, tax deferred accounts which would place us in the 22-24% marginal tax rate.
    In essence we are a creating a tax arbitrage of 10-13% on pretax contributions of  376,000

    Would we be better off investing in taxable accounts vs the Schwab Defined Benefit plan/tax deferred ?

    The schwab plan would cost around 20K over 8 yrs

    #219793 Reply
    Avatar Steven Podnos MD CFP 
    Participant
    Status: Physician, Financial Advisor
    Posts: 134
    Joined: 09/21/2017

    I’d recommend using the cash balance plan.  You will get an excess deductible contribution of about 400K over the eight years at a cost of 20K, so 95% of the contributions accrue to you.  Not only do you get the probably arbitrage of lower tax rates in retirement, but you also get close to thirty years of tax deferral for your funds to appreciate.  Throw in asset protection and it’s a nice package.

    #219806 Reply
    Liked by Zaphod
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    Are you DCing the solo 401k?
    I don’t think you should have to. Is the solo 401k at Schwab?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #219823 Reply
    Avatar MTL 
    Participant
    Status: Physician
    Posts: 4
    Joined: 06/07/2019

    Plan to  continue solo 401k for employee portion of  solo401k ( 19K$) only .

    Schwab charges additional 750$  to calculate employer/profit sharing contribution if a solo401k has to work in concert with DB plan. Typically you are limited to 6% profit sharing contribution  if there is a defined benefit plan. Our profit sharing contribution would then be very small and therefore not worth the 750$ fee.

     

    The choice is:

    Defined Benefit Plan (74K)+  Solo401k ( 19K employee Deferral ) vs Solo401k only ( 27K employer+19k employee)

     

     

    #219871 Reply
    Avatar DAK 
    Participant
    Status: Other Professional
    Posts: 20
    Joined: 11/30/2016

    Also consider total MFJ taxable income.  I’m guessing combined that you might exceed threshold for the 199a QBI deduction, but really big DB deductions could move you into range for spouse to claim it.  Of course, if spouse is not in a SSTB, then hitting that threshold is less important.

    #219944 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    ^^^ good point. Also child tax credit phaseout from AGI $400-$440k. Marginal tax rate through that range is increased 5% per child eligible for the $2k credit.

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #219949 Reply
    Avatar MTL 
    Participant
    Status: Physician
    Posts: 4
    Joined: 06/07/2019

    My spouse’s income  would qualify for the 199a QBI deduction. But our combined MFJ AGI phases us out of that deduction.  I am a high W-2 income earner, my income leads to this phaseout. My spouse income of 150K  is 1099 income

    As a W-2 income earner, I  have limited tax deferred space.  Hence the desire to increase our deferred space thru spouse’s 1099 income . Our  marginal tax rate is at 35%

     

    The Schwab defined benefit plan is essence a tax arbitrage from marginal tax rate of 35% to maybe 22% in retirement . The tradeoff is the loss of flexibility given the required contributions to DBP. Mathematically the correct answer is to go with the defined benefit plan

    The choice is  74K pretax in defined benefit plan vs  current 27k employer/profit sharing contribution in solo 401k for 8 yrs  and then roll DBP into IRA or solo401k.

    Spouse’s income is stable as far as we know but dependent on shift availablity as locum tenens provider in the community, so there is always a unknown.

     

    Would forum members recommend proceeding with DBP ?

     

     

    #220002 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    How many kids 18 or under?
    AGI anticipated if you do the DBP?

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #220006 Reply
    Avatar MTL 
    Participant
    Status: Physician
    Posts: 4
    Joined: 06/07/2019

    How many kids 18 or under?
    AGI anticipated if you do the DBP?

    Click to expand…

    2 kids under age 18 ( 15 &9)

    AGI after contribution to  DPB would be  580K

    #220043 Reply
    Avatar jacoavlu 
    Moderator
    Status: Physician, Small Business Owner
    Posts: 1998
    Joined: 03/01/2018

    Yeah at that point I’d go for all the tax deductions I could get and take my chances on future tax rates

    The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVA

    #220044 Reply

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