He could only contribute about $312,000 each year. By taking into account his past service and his ability to restate his existing plan, we were able to convert his plan to a benefit-focused retirement plan. The new plan would provide him with a projected contribution and tax deduction in excess of $519,000 for the next 10 years.
Commercial window installation company: A family business with 11 employees wanted to fund the maximum 401(k) benefits for four key executives while minimizing contributions for the remaining seven.
Integrating a traditional defined benefit plan with the existing 401(k) plan would result in total contributions of about $725,000. Utilizing a benefit-focused plan with the 401(k) plan, the company was able to put away more than $1,554,000 annually with 92% of the contribution going toward the four key executives.
Restaurateur: A 45-year-old owner of two restaurants with 11 full-time employees and 25 part-time employees is making a lot of money in his businesses and his accountant prompted him to set up a retirement plan. Considering the transient nature of many of his employees, the restaurant owner was looking for a plan where he would be the most significant beneficiary.
He first considered a traditional defined-benefit plan. He found he could fund nearly $176,000 a year for himself and the 11 full-time employees. Instead, by choosing a benefit-focused plan, he is able to contribute and take a tax deduction of about $441,000 for the next 10 years with 89% going toward his retirement benefits.
Hedge fund partners: A hedge fund with 22 employees was looking to implement a retirement plan. The fund's tax advisors initially could not come up with a plan that was able to benefit the managing partners in any meaningful way until they were introduced to the benefit-focused plan.
Using the benefit-focused plan, we were able to give them a first year pretax contribution of $1,095,000. Aside from this significant tax deduction, the two managing partners receive 85% of the retirement benefits.
Accountant: An accounting firm with nine employees was looking to fund retirement benefits for the owner and founder of the firm as well as his two key executives. The firm already had a defined benefit plan along with a 401(k) profit-sharing plan.
Contributions to the plans were maxing out at about $230,000 per year. This was proving insufficient, as they determined they needed additional funds to meet their planning goals. By restating the existing defined benefit plan and converting it into a benefit-focused plan, we were able to give them a projected level contribution of $678,000 per year with 94% going to the founder and the two key CPAs.
Implications
Qualified retirement plans are one of the best ways to address the needs of mitigating taxes and creating tax-free growth for business owners. Considering the potential for future increases in taxes, the appeal of qualified plans is inclined to rise. However, please note that some types of qualified retirement plans are better for successful business owners than for others.
If the objectives of a successful business owner are to make the largest contributions with the accompanying tax deductions possible and get the lion's share of the financial benefits for a select number of senior managers and owners, then a benefit-focused retirement plan needs to be considered. With these goals in mind, the benefit-focused plan is an effective and powerful qualified retirement plan.
Michael J. Desmond is a senior wealth management advisor for Provident Bank. He has an extensive wealth advisory background enabling him to create and implement customized solutions for the bank's high-net-worth clientele.
Frank W. Seneco is president of Seneco & Associates, an internationally recognized advanced planning boutique. He works extensively with the very wealthy providing life insurance and related solutions.