Coronavirus Operations Memo: Click Here | Magnus documents: Form ADV | Form CRS | Privacy Policy

How can you take your business’ retirement plan to the next level?

- March 26, 2019

Michael S. Schwartz, CFP®, AEP®

I apply a multidisciplinary approach to wealth management dovetailed with structured tax planning.

View on Worth.com


Here’s how professional golfer Doug Sanders once described his retirement plan: “I’m working as hard as I can to get my life and my cash to run out at the same time. If I can just die after lunch Tuesday, everything will be perfect.”

It’ll grab some laughs at the 19th hole, but for many Americans, it’s the plan they have in place—and that’s no laughing matter. As a business owner, how can you build a plan to provide yourself, your partners and your employees with a comfortable retirement?

There are two main types of employersponsored retirement plans: qualified retirement plans (QRPs) and nonqualified plans. This article will focus on QRPs.

A QRP is established by an employer for the benefit of the owners and employees and must meet the requirements set out by the Internal Revenue Code (IRC) Section 401(a). These plans give employers a tax deduction for the contributions they make for their employees and present an opportunity for participants to defer a portion of their income into the plan to reduce their present incometax liability. Plan contributions generally are not taxed until the participant starts to make withdrawals.

As a business owner, what are some of the benefits of your sponsoring a QRP?

● You can use the plan to save for your own retirement on a pretax basis

● Contributions for employees are generally tax-deductible.

● Plan assets grow tax-deferred and are afforded greater creditor protection.

● A good retirement plan can help your business recruit, retain and reward employees.

QRPs are either defined contribution (DC) or defined benefit (DB) plans. A DC plan does not promise a specific amount of money at retirement. The employer, the employee or both contribute to the employee’s individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually on a pretax basis. The employee will ultimately receive the balance, which is based on contributions plus or minus investment gains or losses.

In contrast, a DB plan customarily promises a specified monthly benefit at retirement. More commonly, it may calculate a benefit through a formula that considers such factors as an employees’s compensation and years of service.

Two common types of DC plans are 401(k) plans and profit-sharing plans (PSP). For 2019, annual 401(k) contributions are limited to $19,000. An additional $6,000 is allowed as part of a “catch-up” clause for those aged 50 and above.

Profit-sharing plans allow employers to make discretionary contributions depending on profits. There are different allocation formulas that can be used, but for business owners, in many instances, the most favorable is the new comparability plan. Owners closer to normal retirement age may be able to make greater contributions for themselves without having to make the same level of contribution for the staff. For 2019, the limit for defined contribution plans under IRC Section 415(c)(1)(A) is $56,000 annually, so between a 401(k) and a PSP, your contributions cannot exceed this limit (though the limit is increased to $62,000 with the catch-up contribution). Compared to fully funding a 401(k) plan, a max-funded PSP plan provides additional utility to save for retirement.

A cash balance plan is a DB plan that supplements a 401(k) and PSP with substantially larger contributions and associated tax savings. At retirement, employees can either take the lump sum or elect an annuity for monthly payments. Cash balance plans have gained popularity, due mainly to their flexibility and their potential for much larger taxdeductible contributions. It is not uncommon for the owner’s maximum allowable plan contributions to be in excess of $100,000. By combining cash balance plans with a 401(k) and a PSP, business owners can rely on an additional benefit of up to $225,000 per year in retirement. Cash balance plans provide a meaningful way for business owners to save for their retirement. In Doug Sanders’ instance, implementing a cash balance plan might have allowed him time to play more rounds of golf and to order a few more lunches with the additional savings.

In the game of retirement planning, there is no hole in one. However, by adding a QRP to your business, you will get a tax-favored funding vehicle that can provide meaningful tax deductions today and additional financial security in the future.

ABOUT MAGNUS FINANCIAL GROUP, LLC

Guest Contributors
Michael Schwartz, CFP®, AEP®; Michael Brown, Ron Deutsch, CFA®, MBA; Brian Flynn; Paul Hoerrner Jr., CFP®; Michael Tanney; and Travis Nelson, CFP®
at Magnus Financial Group LLC.
MagnusFinancial.com | service@magnusfinancial.com | 800.339.1367

DISCLAIMER

Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any macroeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.

This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.

Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest.

The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at www.adviserinfo.sec.gov.

TERMS OF USE

This report is intended solely for the use of its recipient. There is a fee associated with the access to this report and the information and materials presented herein. Re-distribution or republication of this report and its contents are prohibited. Expert use is implied.

DEFINITIONS

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.