Big Tax Savings with Retirement Plans

Presented by:Eric PetersenHicks Pension Services

History of Pension Plans

1875 1st Pension plan created 1900 1st Union pension plans 1921 1st retirement plan for Federal Workers 1935 Social Security Act introduced – Retirement

age was 65 but life expectancy was only 63 1942 1st Federal law allowing employers to deduct

pension plan contributions 1960 Start of smaller employers establishing plans. 1974 ERISA pension law passed. 1978 401-k provision added Now Only 12% of all smaller employers offer plans.

DB vs. DC Plan

Defined Contribution plan limits the amount of money going into the plan.52,000 per year57,500 if over 50 years old

Defined Benefit limits the amount of money coming out of the plan.210,000 dollars per year.Amount allowed at age 65 is 2.4MM

Cash Balance Plan

Same as a Defined Benefit PlanWorks best when there are several

employees in the plan.

2.5 MM

Age 65Age 55

250,000 dollars per year

How the plan works

2.5 MM

Age 65Age 55

190,000 dollars per year

5% per year

2.5 MM

Age 65Age 45

72,000 dollars per year

5% per year

2.5 MM

Age 65Age 45

72,000 dollars per year

Over Funded

Fully Funded

Under Funded

Funding Range

Plan assets must be within 50% of the fully

funded level

Investing in a Defined Benefit Plan

An over-funded plan is penalized Under funded plans are required to make

up the difference Predictability is very important Trust should aim for a 5 % return per year Most plans are not invested properly

What to watch out for!

Client should be 50 or older. Plan should run for at least 3 years. Must file forms with Government Must not have older employees.

Add a 401-k deduction to the plan

Increases overall deductible amount by $ 23,000 per year plus optional 6% of pay for Profit Sharing

Adds a little flexibility DB-k

Standard Profit Sharing Plan or SEP

Name Age Salary Pro Rata % Pro Rata $

Owner 60 260,000 20% 52,000Employee 20 25,000 20% 5,000Employee 35 40,000 20% 8,000Employee 55 60,000 20% 12,000

Total 77,000

% to Owner 68%

Cross Tested 401-k Profit Sharing Plan

Name Age Salary 401 kContribution

Cross-Tested %Employer

Contribution

Cross-Tested $

Owner 60 $260,000 23,000 $ 34,500 $57,500

Employee 20 $25,000 $ 1,250 $1,250

Employee 35 $40,000 $ 2,000 $2,000

Employee 55 $60,000 $ 3,000 $3,000

Total $370,000 $63,750

% to Owner

91%

Cash Balance/401-k Combo Plan

Name Age Salary DB Cont. 401(k) Profit Sharing

Total Annual Contribution

Owner 60 200,000 200,000 $23,000 12,000 235,000

Employee 20 25,000 6,500   3,150 9,650

Employee 35 40,000 6,500   2,250 8,750

Employee 55 60,000 6,500   2,580 9,080

Total   265,480

% to Owner 89 %

Target Market

Small business owners with few or no employees

Looking for larger tax deductions. Income in excess of 200,000 dollars Maxed out SEP clients

Thank you