“A defined benefit plan guarantees a specific payout at retirement. The amount of money that can go into a defined benefit plan is actuarially calculated to produce the payout. Monies contributed to the defined benefit plan are tax deductible,” explains PJ DiNuzzo, founder and president of DiNuzzo Middle-Market Family Office and author of The DiNuzzo Middle-Market Family Office Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families. “We regularly find ways these types of plans can help high-income business owners and professionals lower income taxes and build significant retirement help.”
Sophisticated Defined Benefit Plans
“There are a number of different types of defined benefit plans,” says Vince Annable, CEO and founder of VFO Advisory Group and author of The Household Endowment Model: Wealth Planning for Affluent Families, “A mistake many business owners and professionals make is not choosing the right defined benefit plan that best matches their needs and financial goals. Some plans enable putting away hundreds of thousands and potentially millions of dollars. All of which is tax deductible. However, there are multiple options as to which type of plan to utilize to enhance their individuals benefits based on their particular needs. A major reason so many business owners, physicians, and dentists are losing out is that they are not aware of what’s possible, understanding that their options are and they’re likely talking with financial advisors who have a limited understanding of how to implement the right defined benefit plans. We always do a through discovery process to determine the right plan for the client because certain plans allow a significant enhanced benefits depending on the client’s situation.”
For entrepreneurs and professionals to contribute large sums of money to a defined benefit plan, the math has to work. Thus, an actuarial analysis is required. Concurrently, the physicians have to be in a financial position where making large contributions will not adversely impact their lifestyles.
According to Homer Smith, private wealth advisor and founder of Konvergent Wealth Partners and director of the Integrated Business Owners Solutions team, “In helping successful business owners and medical professionals such as doctors and dentists take major tax decisions and increase their wealth using qualified retirement plans, we look at everything from their cash flows to their balance sheet. We also spend a lot of time making certain the physicians, dentists and entrepreneurs clearly understand the qualified retirement plan options so they can make an informed decision.”
Examples Of Sophisticated Qualified Defined Benefit Plans
What is important to realize is that these types of qualified retirement plans are not that common. Many wealth managers, accountants and attorneys are not familiar with some of the different variations and that can result in business owners and professionals losing out. The following are examples of some of these sophisticated qualified defined benefit plans.
1. Two business owners ages 63 and 52 have a distribution company with 22 employees. One of the owners intends to retire in approximately seven years while the other one will stay and run the company. The business owners are able to put $1,881,296 in year one into the plan with additional annual payments actuarially calculated. About 87% of the benefits from the plan will go to the business owners.
2. Two business owners ages 50 and 51 with no employees. Looking for large pension contributions to ensure a lifetime pension income. They are able to put away $1,019,122 in year one with additional annual payments actuarially calculated. Because the staff for their office is covered by the hospital, they receive 100% of the benefits.
3. Three dentists ages 58, 58, and 51 own and run a successful practice with eight employees. They are able to put $2,019,157 in year one into the plan with additional annual payments actuarially calculated. About 97% of the monies will go to the three dentists.
“It’s important for entrepreneurs, professionals and their advisors to recognize that, while sophisticated defined benefit plans are often great ways to lower income taxes while creating a large pool of retirement assets, they’re not one and done,” says Frank Seneco, president of the advanced life insurance planning boutique, Seneco Global Advisors. “So that they stay in compliance, these plans must be reviewed annually or when major changes occur like an acquisition. Whether it’s a lawyer, accountant or wealth manager, to continue to get the benefits, the plans might need to be tweaked as circumstances change.”
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