100% Deductible: Tax-Advantaged Business Retirement Plans

by D. Kirk Buchanan

Overview

This book provides executives and owners of small businesses an introductory explanation of the general types of retirement funding vehicles available to them on a tax advantaged basis. From Profit Sharing Plans to Pension plans to 401(k) Plans, and others, this book provides an easy to understand explanation of the rules and regulations, benefits and concerns, regarding effective employee benefits and retirement plans.

Product Details

ISBN-13:	9780985166106
Publisher:	Clairinch Press
Publication date:	03/15/2012
Pages:	288
Product dimensions:	5.40(w) x 8.40(h) x 0.80(d)

About the Author

Kirk Buchanan is a regional sales director for corporate retirement plans with one of America s oldest and largest financial services companies. He works primarily with financial advisors and pension consultants to help corporations nationwide improve their 401k and other retirement plans while minimizing benefit expenses. With an extensive background in the investment industry, Kirk has focused his expertise on pension and retirement plan administration and marketing since entering the workforce in 1985. He obtained his bachelor s degree in Business and Professional Development from Amberton University in Dallas. Additional undergraduate studies were accomplished at the University of North Texas in Denton, and the University of Texas at Dallas. Kirk has also completed the Executive Management Program through the Edwin L. Cox School of Business at Southern Methodist University (SMU) in Dallas. His continuing education studies include the Master of Liberal Arts Degree program with SMU. In addition, he holds a Certificate in Pension Law and Administration from The Philadelphia Institute. He also holds a Certified Retirement Counselor (CRC) designation from the International Foundation for Retirement Education in McLean, Virginia in conjunction with the Center for Financial Responsibility through the College of Human Sciences at Texas Tech University in Lubbock, Texas. Kirk is an active member of the First Baptist Church of Rockwall, Texas, where he also leads a Sunday morning Bible study class. He enjoys biking, hiking, running, and kayaking. He takes great pleasure in reading books, collecting fountain pens, studying chess, art, and great coffee. He is married and the father of three children and step-father of four more. Five of them are currently in college, one is in graduate school, and the youngest is in high school.

Read an Excerpt

CHAPTER 1

Introduction to Tax-Advantaged Plans

For many years Congress has recognized that saving for retirement is a worthwhile social objective that should be encouraged by government. Retirement plans have actually been available for many years. In 1875, The American Express Company set up the first employer-provided retirement plan in the nation. Just a few years later, the Baltimore and Ohio Railroad established a plan funded by both employee and employer contributions. Pensions became increasingly popular in America over the next few decades.

Through the use of various tax incentives, the federal government has encouraged the growth of private pension and profit-sharing plans. Millions of companies have adopted them because they enable the company to save taxes and the employees to accumulate money for retirement. The widespread adoption of tax-advantaged retirement plans by both large and small businesses is its own testimonial to the attractiveness of such plans. However, the complexity of the tax laws governing these plans has often discouraged employers, especially the small business employer, from establishing these types of plans. The purpose of this book is to simplify these rules and regulations in order to help the business owner or manager understand the extraordinary benefits of these types of programs. After all, the most important aspect of any business is the bottom line. These types of plans can have a significant and positive impact on that bottom line. A taxadvantaged retirement plan is an invaluable tool in any business for enhancing revenue.

A retirement plan can be adopted by a business whether it operates as a corporation, a subchapter S corporation, a partnership, an LLC, or a sole proprietorship. Once the objectives to be achieved have been determined, then a plan can be selected to help fulfill them. There are many types of tax-advantaged plans from which to choose. For example:

Defined Benefit Plans

A defined benefit plan is what most people think of as a pension plan. The benefit is defined in a formula, and contributions are made every year on a regular basis to accumulate a sum of money in order to be able to pay that benefit.

Defined Contribution Plans

The trademark of a defined contribution plan is that the annual contribution is determined by a formula, and the ultimate benefit depends upon the investment returns of the plan:

Profit-Sharing Plans

The most common defined contribution plan is the profitsharing plan. Generally, contributions are the same percentage of each employee's compensation. These plans permit the company to make contribution as a defined percentage of profits, and contributions can be skipped, reduced, or changed from year to year.

Money Purchase Pension Plans

A companion plan to the profit-sharing plan is the money purchase pension plan. Contributions are determined by using a fixed formula based on a percentage of compensation, and the ultimate benefit depends strongly on the plan's earnings.

Target Benefit Plan

The target benefit plan calculates a fixed annual contribution amount based on actuarial assumptions. A target benefit plan allocates contributions to separate participant accounts and the value at retirement is based on the investment growth in the account.

401(k) Plans

The Cash or Deferred Arrangement (CODA), most commonly referred to as a 401(k) plan allows contributions to come from employees, rather than the company. Through salary reduction agreements, employees elect to reduce their salaries by a certain percentage and that amount is contributed to their accounts in the plan.

Simplified Employee Pension (SEP) Plans

To establish a SEP, employees set up Individual Retirement Accounts (IRAs) into which the employer makes contributions. Once the contribution is placed in the employee's account, it belongs to the employee.

Financial Freedom

Financial freedom is one reason many people become business owners. Of course, it is also the primary reason why most employees are even working. However, for many Americans in the workforce today, financial freedom is increasingly more difficult to obtain. Taxes reduce what an individual can save now, while inflation practically guarantees that even more money will be needed later. What can a person do? It is certainly not practical to try to change the tax laws, and the hard realities of retirement will always exist. But there are ways to reduce current taxes and help plan for a secure retirement.

Three Ways to Take Money Out of a Business
If an owner of a business wants to take money out of the business, he has three options:
1. taking the money out as dividends from a corporation
2. taking it as a salary
3. taking the money and putting it into a qualified retirement plan

Throughout this book, I use the words "he, him, himself," etc. in their everyday androgynous sense of "he or she, him or her," etc...because the alternatives tend to produce tedious reading. While the first two options may sound good, the tax consequences could change anyone's mind. For example, assume that an individual wanted to take $25,000 from his business. The table on the following page shows what would be netted under the three options. Taxes dramatically reduce the share in all but the third option.

Why?

Qualified Plans are Tax-Deferred Money in a qualified retirement plan is not taxed until withdrawn. This means that 100% of an individual's money is working for him, compounding free of taxes until withdrawn. Qualified plans are a great way to take money out of the business and allow both the owners and the employees to save for retirement.

Tax Facts of Taking Money out of a Business

	Corporate Dividend	Salary/Income	Qualified Plan
Profits	$25,000	$25,000	$25,000
Corporate Tax	$3,750	$0	$0
Personal Tax	$9,000	$9,000	$0
Net After Tax	$12,250	$16,000	$25,000

Assumptions: 15% corporate tax rate; 36% individual tax rate It is no wonder that millions of employers have used the tax saving benefits available to them in retirement plans to build a strong foundation for the financial future of their employees and themselves.

Since all good things have limits and restrictions, the following chapters of this book will seek to explain, in a very simplified manner, the rules and regulations governing these types of tax-advantaged plans.

Whether an employer's objectives are to get the largest tax deduction on a contribution possible, to provide a program for employees' retirement, or to pass the costs of contributions on to employees through a salary deferral arrangement, there is a plan that is right for every business.

Table of Contents

Chapter 1 Introduction to Tax-Advantaged Plans	15
Chapter 2 The Two Basic Categories of Employer Sponsored Plans	23
Chapter 3 Simplified Employee Pension Plans (SEPs)	29
Chapter 4 Individual Retirement Accounts (IRAs)	37
Chapter 5 Savings Incentive Match Plans for Employees (SIMPLE)	53
Chapter 6 "Keogh" Plans	59
Chapter 7 Profit-Sharing Plans	65
Chapter 8 Money Purchase Pension Plans	73
Chapter 9 Target Benefit Plans	81
Chapter 10 Cash Balance Plans	89
Chapter 11 401(k) Plans - Cash or Deferred Arrangements	97
Chapter 12 Safe Harbor 401(k) Plans	115
Chapter 13 Advanced Plan Designs - Cross-Tested Plans	123
Chapter 14 Employee Stock Ownership Plans (ESOPs)	131
Chapter 15 General Qualification Rules for Qualified Plans	137
Chapter 16 Eligibility Requirements	143
Chapter 17 Definitions of Compensation	147
Chapter 18 Contributions & Deductions	155
Profit Sharing Plans
Money Purchase Pension
Simplified Employee Pension
SIMPLE
Catch up Contributions
Automatic Contributions
Maximum Compensation
Considered
Chapter 19 Rollovers & Transfers	165
Chapter 20 General Distribution Rules	171
Premature Distributions
In-Service Distributions
Survivor Annuity Distribution
Requirements
Chapter 21 Required Distributions at Age 70½	179
Chapter 22 Required Distributions at Death	183
Chapter 23 Vesting Rules	189
Chapter 24 Prohibited Transactions	193
Chapter 25 Responsibilities of the Parties Under the Plan	199
Chapter 26 Fiduciary Responsibilities	205
Chapter 27 Qualified Default Investment Alternatives (QDIA)	213
Chapter 28 Final Comments	219
Appendix	223
A. The Small Business Job Protection Act of 1996
B. Selecting a Beneficiary
C. Pension Protection Act of 2006 (PPA)
Resources	241
Glossary of Terms	243
About the Author	280