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In our case, we have more than 25 employees. We already make generous profit sharing contributions to all employees, both HCE and non-HCE. The current safe harbor/401k/profit sharing plan was not designed to maximally favor the owner because the owner already has more than enough personal wealth.
From what I understand, the current retirement plan could be modified with an add-on defined benefit plan. The add on plan could be for the owner only, or could be for the owner and the HCEs. The primary goal in this set of circumstances would be to optimize short and long term income tax and estate tax planning.
The business owner’s net worth is already heavily tilted to tax deferred (exclusive of the value of the business). There are no Roth accounts and there has never been eligibility for backdoor Roth due to significant sums in a multitude of types of tax deferred accounts:
Owner’s assets not counting the business value:
42% tax deferred
33% real estate
Before spending effort, time, and money changing the retirement plan to allow investing even more in tax deferred, there is a preliminary question to be answered. From an asset allocation perspective, keeping both retirement planning and estate planning in mind, is there already too much money allocated to tax deferred assets? Of course, a cash balance/defined benefit plan would save large sums in terms of current income taxes, but what would the effect be when considering future income taxes and estate taxes?August 27, 2019 at 3:02 am MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241922
I was not involved in that particular thread, but your humility in stepping back to appreciate other’s perspectives and to then apologize is always appreciated.
Cash balance plans are not as advantageous at your age, under 40. Would you be solo in this plan? Can you fund it over a shorter period and then terminate and roll it over to your 401k to save on fees?
I am also currently considering this type of plan but I am significantly older than you and have no debt left. For me it is taxable investing or opening up more tax deferred space with this type of plan as an add-on.
I am always up for good rational disagreement. 🙂
Let me try stating this another way. If large income taxes are paid up front and I then invest the remainder (a bit more than half of the original amount) in taxable, I will have a smaller estate than if I invested that same income in tax deferred. And the resulting smaller estate could potentially lead to less estate taxes.
Maybe one of the estate planning folks will chime in with an opinion on this.August 25, 2019 at 2:52 pm MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241618
Let’s say I have 1M to invest and I invest it in taxable after paying 50% tax. I now have 500k and I die.Click to expand…
I’m not following paying 50% tax for investing in a taxable account.Click to expand…
Living in a very high tax state, with high income, high marginal tax rates, I would pay 37% federal and then state income tax on top of that. In my case I pay 45.8% total marginal income tax, so I am rounding it to 50%.
Example: I earn 500k, pay almost half of that to income taxes, then invest what is left after paying the tax in my taxable account. If I invest the 500k in tax deferred, the entire 500k goes into the investment, leaving a much larger balance but subject to income tax upon withdrawal, or more estate tax upon death.August 25, 2019 at 1:42 pm MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241608
How do I build a life that allows me to take good care of myself in all realms, physical health, emotional health, enough exercise and sleep?
How can I build healthier and stronger relationships with my spouse, family, friends and community?
How can I position myself in a good place to allow me to give back more to others?
Whether the investments are in tax deferred or in taxable, the estate taxes will be the same.Click to expand…
This sounds funny to me.
Let’s say I have 1M to invest and I invest it in taxable after paying 50% tax. I now have 500k and I die.
Now let’s say I have 1M to invest and I invest it in my tax-deferred cash balance plan. I now have 1M and I die.
Are you saying the estate tax on the 500k and the 1M is the same if I am over the estate tax exemption? Not sure I am following you there.August 25, 2019 at 1:10 pm MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241601
Please note, Cash Balance. There is no need for DB plans anymore, and there are advantages to CB plans (which was also my experience looking at various designs provided to me by actuaries), and we now have a pre-approved plan document available which brought the cost of these plans down.
When you consider the cost vs. benefit for a CB plan, you have to look at the bigger picture. Usually adding a CB plan increases % to owner, which is the primary measure for me. However, there is also a cash flow concern and whether the timing is right for you (for example, if you have high level of high interest debt, I don’t recommend this type of plan in favor of paying your debt down, unless your income is quite high to allow for both).Click to expand…
Thank you Kon for linking your cash balance article. Very helpful.
Is it always true that a cash balance plan is better than a DB plan? Does this depend on the circumstances, or is this always the case?
This business is already intentionally generous to all of the NHCE and HCE employees. The outside pension consultant who was pitching us (probably salivating at the thought of some juicy AUM fees) said that a small increase in contributions for NHCEs from 6% to 7.5% would pass all fairness testing and allow all kinds of flexibility for both HCEs and the owner. This increase in contributions for NHCEs would only cost 0.12% of our annual revenue.
The owner is approaching retirement age, pays large income tax bills every year, funds significant sums to taxable each year, has no outstanding debt of any kind left, and has sufficient extra income to fund a DB or Cash Balance plan.August 25, 2019 at 1:06 pm MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241600
It sounds like you have thought through the many possibilities and are ready for whatever comes. Negotiating can be challenging and everyone handles it differently. You know yourself so you made your demands in a written form to avoid not asking for what you need, a good strategy if you are better in writing than in person.
My daughter is typical for many young women, slow to ask for what she clearly deserves. She likes to wait until raises and promotions are offered on a silver platter. She has finally risen to a high level of leadership and a high level of pay, but it likely took her twice as long to get there due to her patience. One thing I have had to work on is understanding that what works so well for me may not always work so well for others with different personalities and negotiating strengths.FWIW I haven’t ever gone in high and played the meet somewhere in the middle game but rather tell the employer my requirements up front and if they are able to accomodate we have a deal.Click to expand…
I think that is a better approach. In that vein, I actually sent an email earlier this morning listing what I want, gave them 10 business days to reply then said I will be exploring other opportunities and stepping down as medical director if the terms are not agreed to in the alotted time. I went all-in. I have “outs” if we are to continue with the poker analogy. I have updated my CV and am uploading to physician match and I am going to start calling my local contacts this upcoming week.
Thank you to everyone on the forum who gave me the confidence and guidance to be assertive. Even if they say no I will be fine. I have plenty of options.
Thanks!Click to expand…
Wait, so you just sent an ultimatum in an email? I am not sure if that is how I would have done it. I might bring my request in writing to a meeting, discuss it and then hand it to the administrator. By sending an email, you lost an opportunity to read the response.
If the hospital administrator feels screwed by you, backed into a corner, do you think that might have an effect on how that administrator treats you in the future? Even if they agree to accept all of your demands? I have always tried to be firm but nice, and at the same time I have worked hard to be present and to understand the other side’s position so that I can get much of what I want while also giving back some of what is important to the other side.
Please be cautious, and here is a tale of why: A few years back a colleague does something similar to administrator when they are backed into a corner. The physician is given what they demand by the administrator, but there is tremendous bad blood left over from how things were handled. The administrator then secretly goes to a recruiter and hires another doc with credentialing completed several months later. The original doc then gets terminated on the spot, escorted out of the hospital by security for “failing to abide by the terms of the original written contract” and is without a job or income for over four months (time spent securing a new position and then getting credentialed). He did get a locums gig later during that dry spell, but paying the mortgage was tough. It was quite stressful for him and his family.
Remember, how you conduct yourself and how you make people feel is always remembered. Pay back can be painful. If I was in your shoes, I would go meet the administrator at the beginning of this week. And I would walk into the office with a smile and frame it as a listening tour. I might apologize and say that I have a hard time asking for what I need in person, so I put it in writing. And then just listen and explore with some targeted questions the response to what you asked for. “I asked for what I feel is reasonable. Is the hospital able to come through with fair compensation for everything that I do?” Reading the body language is as important as listening to the words. I know we all have different negotiating styles, but be careful not to create hard feelings while at the same time asking for what is fair and what you need.
Would you be in a tough spot if they were to say no and ask you to leave? Or do you think they would allow you to leave on your own preferred timeline? How long would it take for you to secure a better position? When you give an ultimatum, it is important to think through all of your plan B beforehand.
Being willing to leave puts you in a strong negotiating position, but only if you don’t damage relationships in the process should you end up staying, and only if you have a timely transition to a high quality position available if you end up leaving. Try to make this into a win/win if at all possible.
I would recommend saving the money in a high yield online savings account.
You might put $500 towards something fun, but only if it is worth it to you.
And you could consider putting $1000 in a vanguard stock mutual fund to learn about how it feels to stay the course in both up and down markets.
Most of all, cautious spending and saving is best at this point. When I was your age, I lived in a small apartment in a marginal neighborhood for $200/month when typical rents were so much higher. And those were some happy times. I didn’t need much money to find fun things to do.
Be sure to ask for more than you are willing to accept because they will likely only meet you half way.
the pension consultant that spoke to us this week is AUM compensation for the defined benefit portion of the plan, and he mentioned putting life insurance inside the planClick to expand…
super skeptical hippo eyes toward this guy
I’m assuming there are going to be funds of yours and additional employees in the pool. Given this I’m not sure I would direct the investments myself. You want a good flat fee fiduciary advisor. Kon Litovsky would be one person to talk to.Click to expand…
Yes, I asked directly, “How are you compensated for your services?” When I heard AUM and when he recommended considering some life insurance inside the defined benefit plan, my spidey sense of caution!!! went way up.
We have a very good TPA, and they have always directed us well. We also have a good CPA to ask for advice and direction. Basically, what I got out of the meeting is that the opportunity to save with significant income tax deferral got my attention. At the same time, the distributions will eventually be taxed (although they can potentially be stretched out for a long time by heirs), and depending on the state of our union and the estate taxes, the savings on front end income taxes could also be eaten up by estate taxes on the back end.August 23, 2019 at 1:21 pm MST in reply to: Does a defined benefit plan make sense for me? Any experience with this? #241092
5500 seems quite simple, and relatively brief. I would not fear filling out the 5500 return.
Would you go to a physician in their 70s? I have an appointment for next week.
I have known this physician for many years and I am feeling quite comfortable, but hopefully this is a brief consultation involving one or two visits and all is well. If it turns out to be something needing longer follow up, maybe I will decide to then see someone younger. I kind of like the idea of the wisdom gained through all those years of experience.August 23, 2019 at 1:12 pm MST in reply to: Does it matter if your "potential" estate attorney is near retirement? #241089Liked by jfoxcpacfp