Defined Benefit Pension Plan

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pbx1
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Joined: Mon Apr 12, 2021 10:52 am

Defined Benefit Pension Plan

Post by pbx1 »

My wife and I are owners of a S-corp medical practice. We have been doing the SEP-IRA max for ourselves the last few years. We're hoping to protect even more of our income from taxes by possibly setting up a Defined Benefit Pension Plan which could let us potentially stash 200-400k away each year. I know it can be complicated requiring one to use an actuary.

Has anyone here participated or set that plan up? Were you able to invest that money into an IRA of your choosing? Any other input on it?

Thanks in advance!
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Yes. It's the best. Do it. If you like I can tell you who I use (PM me). You set up the plan, hire them to do the paperwork, and you choose where you want the funds held. Mine is at VG so I can choose anything through the VG website. It's like having a mega-401K. If I had it to do over again I would do it at Fidelity as I would play a little with the Hedgefundie plan and VG does not allow leverage. With that said, I'm probably better off having it forbidden to me as I could see me gambling it all away...
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Your age makes a big if it’s worth it

A big reason why is the contributions are sort of age based and amounts will change what you can contribute to defined contribution plans.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 3:53 pm Your age makes a big if it’s worth it

A big reason why is the contributions are sort of age based and amounts will change what you can contribute to defined contribution plans.
True. If you had lots of partners age would matter. But if as I understand it's only you and your wife, it is like opening up a massive 401K (like instead of 56K or whatever the maximum is a year there's another 150 or more). I inadvertently over funded mine (my third party administrator really didn't know what she was doing) so now I can't fund mine anymore. But it was a great decision.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Age is a factor even if it’s just the two of them

If you over find the policy me you close the plan then everything over the maximum benefit for age goes to the government

The maximum benefit is currently (as a lump sum and not salary) just shy of 3 million dollars at age 59.5. It is scaled back

You also must currently have a salary at least what your benefit is in regards to what would be a pension. So if you are looking to have the maximum benefit which is around 230k per year then the salary has to be that. So for both of them that’s 460k. This is just an example but you can’t for instance just give yourself a salary of 50k and stuff a true defined benefit plan to the max.

As one ages, the amount needed to provide that benefit increases bc there is less time to make it happen.
bsteiner
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Re: Defined Benefit Pension Plan

Post by bsteiner »

An actuarial firm can design the plan to best accomplish your objectives.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 5:23 pm Age is a factor even if it’s just the two of them

If you over find the policy me you close the plan then everything over the maximum benefit for age goes to the government

The maximum benefit is currently (as a lump sum and not salary) just shy of 3 million dollars at age 59.5. It is scaled back

You also must currently have a salary at least what your benefit is in regards to what would be a pension. So if you are looking to have the maximum benefit which is around 230k per year then the salary has to be that. So for both of them that’s 460k. This is just an example but you can’t for instance just give yourself a salary of 50k and stuff a true defined benefit plan to the max.

As one ages, the amount needed to provide that benefit increases bc there is less time to make it happen.
Actually the option most people take is the lump sum as you described. However if you want you can make it a traditional pension (if you overfund, eg) where there is a fixed dollar amount that it pays out. Usually it is set up for the former but I had to plan on the latter because of the overfunding.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Yes but there can’t be more in the plan at termination than the maximum benefit for your age

I’m 51 this year and if memory serves me correctly that’s near 2 million. I actually have more in there than that bc of Tesla. If I terminated today I’d lose the amount above 2 million

These plans typically have very conservative projections in the last 7 or so years. The goal is to get it to that amount then terminate rolling it over to IRA. Invest more aggressively at that point if desired.

You can’t have more than the defined benefit
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

My understanding, having done exhaustive research when I realized it was overfunded, is that most people will fund it until maximizing it, then transfer the funds to an IRA. An alternative would be to use it as a traditional pension, take out your annual salary, and then when the funds are low enough to be at the maximum, cash out to the IRA.

From the IRS:

Contributions to a defined benefit plan are based on what is needed to provide definitely determinable benefits to plan participants. Actuarial assumptions and computations are required to figure these contributions.

In general, the annual benefit for a participant under a defined benefit plan cannot exceed the lesser of:

100% of the participant's average compensation for his or her highest 3 consecutive calendar years, or
$230,000 for 2021 and 2020 ($225,000 for 2019)
The dollar amounts are subject to cost-of-living adjustments in future years.

So it seems you can use your DB plan as a traditional pension. By default that became my plan otherwise I would lose the money as you said to the government.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

I’m sorry but you should ask your TPA to provide a chart for the maximum benefit obtainable by age with your current performance

Usually they charge about 300 bucks though for the graph

Otherwise there would be no such thing as over funded.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Also you don’t as an individual want to do the second bc of annual costs

The plan I mentioned is about optimal
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 7:37 pm I’m sorry but you should ask your TPA to provide a chart for the maximum benefit obtainable by age with your current performance

Usually they charge about 300 bucks though for the graph

Otherwise there would be no such thing as over funded.
Oh believe me when I found out from the first TPA that it was overfunded (significantly) and I really didn't have any options, and a lot of the money I put in was going to be thrown away and go to the government I looked into it a lot. The consensus was that most small business with DB's contribute until they hit the lifetime maximum lump sum, then distribute it into an IRA. In that scenario I lose a ton of money. I personally did a ton of research and then found out that nearly all small businesses do that (rollover to IRA when they hit the max) but there is an option to use it as a traditional pension. If I take the max lump sum I throw away a ton of money. That was my definition of overfunded. On the other hand if I do the maximum annual benefit (pension) which is currently capped at 230K (I think), I should be able to drain the fund completely. I also read - not material now because I'm still working - that I can run the traditional pension (230K annually) and when it gets low enough under the lump sum limit, transfer the lump sum into an IRA.

But yes I reviewed it thoroughly with both TPAs - the one who had me overcontributing, and the one I switched to as soon as I realized she hosed me. The latter said everyone takes the lump sum and that is what she recommends but I'll lose a ton of money. I asked her is it possible to have a traditional pension instead and she said yes but from her fiduciary position she can't recommend it. I don't understand why but she confirmed that my strategy above - using it as a pension - is legitimate.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 7:38 pm Also you don’t as an individual want to do the second bc of annual costs

The plan I mentioned is about optimal
I would love to minimize costs. But the costs of maintaining the plan aren't so much, certainly less than giving the government all the overfunded money!
Big Worm
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Re: Defined Benefit Pension Plan

Post by Big Worm »

be careful of costs and expenses. If I had to do it all over again would use an independent consultant, if such a thing exists. Realize you can't just pay yourself a pittance for a salary, it has to be reasonable - and the money you stash away each year depends on your age and actuarial assumptions. Finally, you can't just invest 100% in the index 500 fund or whatever and hope to let it rip - investments need to be reasonable so that if the market tanks you aren't up a creek without a paddle because you can get locked into contributions and also be required to make up shortfalls. Most folks seem to keep the plan 5-7 or 10 years and then roll the funds out and maybe start again.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Big Worm wrote: Mon Apr 12, 2021 7:54 pm be careful of costs and expenses. If I had to do it all over again would use an independent consultant, if such a thing exists. Realize you can't just pay yourself a pittance for a salary, it has to be reasonable - and the money you stash away each year depends on your age and actuarial assumptions. Finally, you can't just invest 100% in the index 500 fund or whatever and hope to let it rip - investments need to be reasonable so that if the market tanks you aren't up a creek without a paddle because you can get locked into contributions and also be required to make up shortfalls. Most folks seem to keep the plan 5-7 or 10 years and then roll the funds out and maybe start again.
That isnt a big deal for most individuals doing this and they cant max it out without a relatively reasonable salary. Thats really a seperate S corp type issue.
ive been 100% stocks for a long time. It worked out fine for me. If it didnt well then the government allows me to try again. If i didnt have the money to do it for some reason then guess what since i own the company and am the only employee, i just have the plan modified to a lower benefit.

Now if you have a bunch of employees......thats a different conversation.
Last edited by Rex66 on Mon Apr 12, 2021 8:08 pm, edited 1 time in total.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Shalom Aleichem wrote: Mon Apr 12, 2021 7:45 pm
Rex66 wrote: Mon Apr 12, 2021 7:37 pm I’m sorry but you should ask your TPA to provide a chart for the maximum benefit obtainable by age with your current performance

Usually they charge about 300 bucks though for the graph

Otherwise there would be no such thing as over funded.
Oh believe me when I found out from the first TPA that it was overfunded (significantly) and I really didn't have any options, and a lot of the money I put in was going to be thrown away and go to the government I looked into it a lot. The consensus was that most small business with DB's contribute until they hit the lifetime maximum lump sum, then distribute it into an IRA. In that scenario I lose a ton of money. I personally did a ton of research and then found out that nearly all small businesses do that (rollover to IRA when they hit the max) but there is an option to use it as a traditional pension. If I take the max lump sum I throw away a ton of money. That was my definition of overfunded. On the other hand if I do the maximum annual benefit (pension) which is currently capped at 230K (I think), I should be able to drain the fund completely. I also read - not material now because I'm still working - that I can run the traditional pension (230K annually) and when it gets low enough under the lump sum limit, transfer the lump sum into an IRA.

But yes I reviewed it thoroughly with both TPAs - the one who had me overcontributing, and the one I switched to as soon as I realized she hosed me. The latter said everyone takes the lump sum and that is what she recommends but I'll lose a ton of money. I asked her is it possible to have a traditional pension instead and she said yes but from her fiduciary position she can't recommend it. I don't understand why but she confirmed that my strategy above - using it as a pension - is legitimate.
i dont have all your info but im also experienced with having had more than one tpa
thats not the strategy id recommend. For you at this point is what i would do is the following:
lets say you are a 60:40 type of person. Id make the DB plan all bonds at this point. The maximum benefit has always been increased every few years just like they do with other DC type plans. As this happens, you will be less and less over funded for age.
You dont likely want to do what you are proposing bc in "retirement" when you are taking money out, you wont be able to contribute money to make the plan whole again. You cant just take money from other savings and put it in there. It has to be income and that just isnt an easy situation for an individual. Companies do this bc they plan to be in business long after you and I are dead.
123
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Re: Defined Benefit Pension Plan

Post by 123 »

This is a great way to turn potential long-term capital gains tax gains into ordinary income. I suspect you could afford to buy-and-hold. And you are doing this to save taxes?
The closest helping hand is at the end of your own arm.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

this is all pre tax money. its a qualified plan. thus that doesnt apply bc taxes have yet to be paid.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

123 wrote: Mon Apr 12, 2021 8:14 pm This is a great way to turn potential long-term capital gains tax gains into ordinary income. I suspect you could afford to buy-and-hold. And you are doing this to save taxes?
It's the same as a 401K. Functionally. You put in pretax dollars, invest them tax free, then pay taxes as income when it comes out. Whether it's a good deal or not of course depends on if you think your tax rate now + Cap Gains tax later <> Income tax rate in future. I imagine for many financially successful Bogleheads here it's not a clear decision as to whether or not to fund a 401K (not including match). As I'm now older a few years ago is when it hit me that 401K really might not be a good plan for everyone - especially early in your career when you're not at the highest tax bracket, if you think you will be at the highest tax bracket at retirement.

For me I'm happy I did it. But I acknowledge that it's not a clear YES on the 401K (or pension).

An additional benefit to the pension and other retirement accounts is legal protection - if you are sued often the retirement accounts are protected. So having it there includes liability insurance.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 8:20 pm this is all pre tax money. its a qualified plan. thus that doesnt apply bc taxes have yet to be paid.
I THINK his point was that if you took money out as salary now, paid taxes, and invested the proceeds, the Cap Gains would be taxed as Cap Gains. Instead if you basically have a mega-401K, don't pay taxes now, let the value rise, THEN take it out at retirement, you are paying salary taxes, not Cap Gains taxes. I think it's true and something to think about, but that is actually an argument about should you have a 401K - which is the same thing. I think it's a legitimate question - if you do a 401K or DB, you are deferring taxes, investing, then taking that sum out as salary/income and paying those taxes on it. If you do not fund a qualified retirement vehicle, you take the money out now, invest it, and pay CG taxes on the CG (instead of income as in the former case). So (Tax rate now + CG rate at retirement) <> (Tax rate at retirement)? I don't know. Depends on the person.

What if the government does away with income tax and switches to a VAT? Then you're a lot better off with a qualified tax deferral plan.
What if the government raises income tax rates really high? Then you're a lot better off if you paid taxes when you were young and only had to worry about CG taxes.
What if the government decides the rich have to pay their fair share and raise CG taxes to income taxes? Then you would have been a lot better off with the qualified plan and deferring taxes.

A lot of what if's.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Early on the game would be 401k to Ira to Roth convert at your then lower tax bracket.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 8:07 pm
Shalom Aleichem wrote: Mon Apr 12, 2021 7:45 pm
Rex66 wrote: Mon Apr 12, 2021 7:37 pm I’m sorry but you should ask your TPA to provide a chart for the maximum benefit obtainable by age with your current performance

Usually they charge about 300 bucks though for the graph

Otherwise there would be no such thing as over funded.
Oh believe me when I found out from the first TPA that it was overfunded (significantly) and I really didn't have any options, and a lot of the money I put in was going to be thrown away and go to the government I looked into it a lot. The consensus was that most small business with DB's contribute until they hit the lifetime maximum lump sum, then distribute it into an IRA. In that scenario I lose a ton of money. I personally did a ton of research and then found out that nearly all small businesses do that (rollover to IRA when they hit the max) but there is an option to use it as a traditional pension. If I take the max lump sum I throw away a ton of money. That was my definition of overfunded. On the other hand if I do the maximum annual benefit (pension) which is currently capped at 230K (I think), I should be able to drain the fund completely. I also read - not material now because I'm still working - that I can run the traditional pension (230K annually) and when it gets low enough under the lump sum limit, transfer the lump sum into an IRA.

But yes I reviewed it thoroughly with both TPAs - the one who had me overcontributing, and the one I switched to as soon as I realized she hosed me. The latter said everyone takes the lump sum and that is what she recommends but I'll lose a ton of money. I asked her is it possible to have a traditional pension instead and she said yes but from her fiduciary position she can't recommend it. I don't understand why but she confirmed that my strategy above - using it as a pension - is legitimate.
i dont have all your info but im also experienced with having had more than one tpa
thats not the strategy id recommend. For you at this point is what i would do is the following:
lets say you are a 60:40 type of person. Id make the DB plan all bonds at this point. The maximum benefit has always been increased every few years just like they do with other DC type plans. As this happens, you will be less and less over funded for age.
You dont likely want to do what you are proposing bc in "retirement" when you are taking money out, you wont be able to contribute money to make the plan whole again. You cant just take money from other savings and put it in there. It has to be income and that just isnt an easy situation for an individual. Companies do this bc they plan to be in business long after you and I are dead.
I'm not sure I understand. The actuary recommended actually one solution as you mentioned - don't invest in things you think will be a high rate of return. I was like WHAT?!? Why would I intentionally invest in poor investments (or more conservative investments) that I otherwise wouldn't? I'm about 90/10 now, 52 YO. I recognize that's aggressive, but I'm just starting to wean down. My thought is - if I have a giant pot of money at retirement I have options. If I intentionally invest more conservatively than I would like and end up with a smaller pot I have fewer options. I acknowledge that in order to drain the fund I would have to take it out as salary, but it is what it is. If I'm retired and taking 150K or 200K annually out as salary, it's annoying from a tax perspective but not such a bad thing overall. That's a lot of money (to me, at least), presumably my house would be paid off by that point, and I think it would be - after taxes - more than what I spend. However bad taxes are, they can't be that bad at 150-200K if that's my only income, where I will lose sleep at night. And if it is more than what I need I can either invest it or give it to charity.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Shalom Aleichem wrote: Mon Apr 12, 2021 8:35 pm
Rex66 wrote: Mon Apr 12, 2021 8:20 pm this is all pre tax money. its a qualified plan. thus that doesnt apply bc taxes have yet to be paid.
I THINK his point was that if you took money out as salary now, paid taxes, and invested the proceeds, the Cap Gains would be taxed as Cap Gains. Instead if you basically have a mega-401K, don't pay taxes now, let the value rise, THEN take it out at retirement, you are paying salary taxes, not Cap Gains taxes. I think it's true and something to think about, but that is actually an argument about should you have a 401K - which is the same thing. I think it's a legitimate question - if you do a 401K or DB, you are deferring taxes, investing, then taking that sum out as salary/income and paying those taxes on it. If you do not fund a qualified retirement vehicle, you take the money out now, invest it, and pay CG taxes on the CG (instead of income as in the former case). So (Tax rate now + CG rate at retirement) <> (Tax rate at retirement)? I don't know. Depends on the person.

What if the government does away with income tax and switches to a VAT? Then you're a lot better off with a qualified tax deferral plan.
What if the government raises income tax rates really high? Then you're a lot better off if you paid taxes when you were young and only had to worry about CG taxes.
What if the government decides the rich have to pay their fair share and raise CG taxes to income taxes? Then you would have been a lot better off with the qualified plan and deferring taxes.

A lot of what if's.
I don’t think so

He said convert long term to income. There is no conversion like with annuity purchase vs taxable.

I think he just doesn’t understand what this is

Without any tax law changes then it’s a benefit for most who have the ability to overfund

Keep in mind that as you remove money it’s not all at the top bracket. You must fill the lowers first. Putting it in for most is at the top.
bsteiner
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Re: Defined Benefit Pension Plan

Post by bsteiner »

There are ways to use the overfunding. Survivorship pension for spouse. Employ children and give them minimum pension allowed regardless of their salary. Sell the business with the plan to a buyer whose plan is underfunded.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 8:36 pm Early on the game would be 401k to Ira to Roth convert at your then lower tax bracket.
I don't know if you are addressing me on that one but depending on what happens with the DB the pension may be such that I don't get to the lower rate, at least lower enough to make it worthwhile to convert. I think I've thought about everything, every permutation that my small acorn sized brain allows. I made a foundation and started making major charitable contributions now in anticipation of some large charitable plans I have. I'm still aggressively invested (about 90/10). I think I have enough to pay off the house and retire now but I love my work. I also love making money because that allows me to support others via charity. My buckets of money now are 401K/Profit Sharing, DB, small Roth, small HSA, and taxable investment. My major charitable donations for the foundation were the highest CG funds from the taxable (of course). For retirement (G-d willing not for a long time) my plan was to use the DB to replace income, when it gets small enough convert to IRA. If I need RMD's, use those to contribute directly into the foundation and run charitable works through that. I thought of doing Roth conversion when the market crashed February 2020. I was bold enough to put money into the taxable as it crashed, but was concerned what if we really go into a depression and we all lose our jobs and was not bold enough to do a Roth conversion at that time (but boy do I wish I had!).

Honestly if you have an idea for what I could do differently I'd love to hear it. I'm eager to learn. I've just been presented and also thought of a bunch of different options and none of them result in my keeping more money than the plan above.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

bsteiner wrote: Mon Apr 12, 2021 8:47 pm There are ways to use the overfunding. Survivorship pension for spouse. Employ children and give them minimum pension allowed regardless of their salary. Sell the business with the plan to a buyer whose plan is underfunded.
Thank you!

Yes I thought of that. No spouse currently. Add spouse once I get one. Kids are young enough not really feasible yet. Both are my plan for the future. Including getting a spouse. But getting a spouse plan isn't working as well as I'd like.
Shalom Aleichem
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Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 8:41 pm
Shalom Aleichem wrote: Mon Apr 12, 2021 8:35 pm
Rex66 wrote: Mon Apr 12, 2021 8:20 pm this is all pre tax money. its a qualified plan. thus that doesnt apply bc taxes have yet to be paid.
I THINK his point was that if you took money out as salary now, paid taxes, and invested the proceeds, the Cap Gains would be taxed as Cap Gains. Instead if you basically have a mega-401K, don't pay taxes now, let the value rise, THEN take it out at retirement, you are paying salary taxes, not Cap Gains taxes. I think it's true and something to think about, but that is actually an argument about should you have a 401K - which is the same thing. I think it's a legitimate question - if you do a 401K or DB, you are deferring taxes, investing, then taking that sum out as salary/income and paying those taxes on it. If you do not fund a qualified retirement vehicle, you take the money out now, invest it, and pay CG taxes on the CG (instead of income as in the former case). So (Tax rate now + CG rate at retirement) <> (Tax rate at retirement)? I don't know. Depends on the person.

What if the government does away with income tax and switches to a VAT? Then you're a lot better off with a qualified tax deferral plan.
What if the government raises income tax rates really high? Then you're a lot better off if you paid taxes when you were young and only had to worry about CG taxes.
What if the government decides the rich have to pay their fair share and raise CG taxes to income taxes? Then you would have been a lot better off with the qualified plan and deferring taxes.

A lot of what if's.
I don’t think so

He said convert long term to income. There is no conversion like with annuity purchase vs taxable.

I think he just doesn’t understand what this is

Without any tax law changes then it’s a benefit for most who have the ability to overfund

Keep in mind that as you remove money it’s not all at the top bracket. You must fill the lowers first. Putting it in for most is at the top.
True.

Putting it in is at the top bracket. Taking it out is filling the brackets from low to high.
Rex66
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Re: Defined Benefit Pension Plan

Post by Rex66 »

Shalom Aleichem wrote: Mon Apr 12, 2021 8:40 pm
Rex66 wrote: Mon Apr 12, 2021 8:07 pm
Shalom Aleichem wrote: Mon Apr 12, 2021 7:45 pm
Rex66 wrote: Mon Apr 12, 2021 7:37 pm I’m sorry but you should ask your TPA to provide a chart for the maximum benefit obtainable by age with your current performance

Usually they charge about 300 bucks though for the graph

Otherwise there would be no such thing as over funded.
Oh believe me when I found out from the first TPA that it was overfunded (significantly) and I really didn't have any options, and a lot of the money I put in was going to be thrown away and go to the government I looked into it a lot. The consensus was that most small business with DB's contribute until they hit the lifetime maximum lump sum, then distribute it into an IRA. In that scenario I lose a ton of money. I personally did a ton of research and then found out that nearly all small businesses do that (rollover to IRA when they hit the max) but there is an option to use it as a traditional pension. If I take the max lump sum I throw away a ton of money. That was my definition of overfunded. On the other hand if I do the maximum annual benefit (pension) which is currently capped at 230K (I think), I should be able to drain the fund completely. I also read - not material now because I'm still working - that I can run the traditional pension (230K annually) and when it gets low enough under the lump sum limit, transfer the lump sum into an IRA.

But yes I reviewed it thoroughly with both TPAs - the one who had me overcontributing, and the one I switched to as soon as I realized she hosed me. The latter said everyone takes the lump sum and that is what she recommends but I'll lose a ton of money. I asked her is it possible to have a traditional pension instead and she said yes but from her fiduciary position she can't recommend it. I don't understand why but she confirmed that my strategy above - using it as a pension - is legitimate.
i dont have all your info but im also experienced with having had more than one tpa
thats not the strategy id recommend. For you at this point is what i would do is the following:
lets say you are a 60:40 type of person. Id make the DB plan all bonds at this point. The maximum benefit has always been increased every few years just like they do with other DC type plans. As this happens, you will be less and less over funded for age.
You dont likely want to do what you are proposing bc in "retirement" when you are taking money out, you wont be able to contribute money to make the plan whole again. You cant just take money from other savings and put it in there. It has to be income and that just isnt an easy situation for an individual. Companies do this bc they plan to be in business long after you and I are dead.
I'm not sure I understand. The actuary recommended actually one solution as you mentioned - don't invest in things you think will be a high rate of return. I was like WHAT?!? Why would I intentionally invest in poor investments (or more conservative investments) that I otherwise wouldn't? I'm about 90/10 now, 52 YO. I recognize that's aggressive, but I'm just starting to wean down. My thought is - if I have a giant pot of money at retirement I have options. If I intentionally invest more conservatively than I would like and end up with a smaller pot I have fewer options. I acknowledge that in order to drain the fund I would have to take it out as salary, but it is what it is. If I'm retired and taking 150K or 200K annually out as salary, it's annoying from a tax perspective but not such a bad thing overall. That's a lot of money (to me, at least), presumably my house would be paid off by that point, and I think it would be - after taxes - more than what I spend. However bad taxes are, they can't be that bad at 150-200K if that's my only income, where I will lose sleep at night. And if it is more than what I need I can either invest it or give it to charity.
They actually always do that with their recommendations. It actually makes sense if you have a ton of employees. If for instance the market crashed then its just too much for anyone to pony up although these plans give you years to make it whole again. TPAs also want you to be with them a long time. If the plan needs funding then you need them. instant repeat business.

i completely understand that. I too have been aggressive. But you are now trying to fix a problem by making another problem. You arent actually likely getting any more out of the plan by your mechanism. The costs will go up and lets just say your investments do stellar. You have to keep the company afloat as well the entire retirement. You cant have the plan without the company. At some point you are risking too much to have audits and other issues that you cant really explain easily. Maybe it works out but there is a reason the TPA told you not to do what you are thinking. You are going to spend a lot of money to have the plans recertified every so often beyond just annual fees. You know you need to be more conservative. This is the best place for you to do so at this point.

Your mistake is believing you can really have a larger pot of money with DB plans. The benefit is defined period. The government tells you what the pot can be. You dont get to have a bigger pot. With DC plans like a 401k, only the contribution is defined so you can have a bigger pot of money. You are trying to come up with some creative way to get around the system. Pretty risky that it doesnt work IMO.
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Defined Benefit Pension Plan

Post by Rex66 »

Shalom Aleichem wrote: Mon Apr 12, 2021 8:48 pm
bsteiner wrote: Mon Apr 12, 2021 8:47 pm There are ways to use the overfunding. Survivorship pension for spouse. Employ children and give them minimum pension allowed regardless of their salary. Sell the business with the plan to a buyer whose plan is underfunded.
Thank you!

Yes I thought of that. No spouse currently. Add spouse once I get one. Kids are young enough not really feasible yet. Both are my plan for the future. Including getting a spouse. But getting a spouse plan isn't working as well as I'd like.
This isnt an easy work around either bc you have to pay them a salary and benefits in conjunction with the plan. Trying to find a buyer who wants to buy and is underfunded but has the money to buy your business at a good price......
Shalom Aleichem
Posts: 263
Joined: Tue Mar 16, 2021 8:55 pm

Re: Defined Benefit Pension Plan

Post by Shalom Aleichem »

Rex66 wrote: Mon Apr 12, 2021 8:53 pm
Shalom Aleichem wrote: Mon Apr 12, 2021 8:48 pm
bsteiner wrote: Mon Apr 12, 2021 8:47 pm There are ways to use the overfunding. Survivorship pension for spouse. Employ children and give them minimum pension allowed regardless of their salary. Sell the business with the plan to a buyer whose plan is underfunded.
Thank you!

Yes I thought of that. No spouse currently. Add spouse once I get one. Kids are young enough not really feasible yet. Both are my plan for the future. Including getting a spouse. But getting a spouse plan isn't working as well as I'd like.
This isnt an easy work around either bc you have to pay them a salary and benefits in conjunction with the plan. Trying to find a buyer who wants to buy and is underfunded but has the money to buy your business at a good price......
One daughter who wants to go into the field so ... she could become an employee and eventually just take over the practice with whatever remains of the funds. It seems to me the best option with no future questions is take out maximum annual salary until the fund is small enough to take the lump sum. After that is add spouse and kids. After that is - if daughter wants to work in the same or similar enough field have her take over that would include the funded DB. Either way, as long as there is no committing more funds to the plan, all things being equal, I would rather have to make decisions with too much money in it rather than too little!
Topic Author
pbx1
Posts: 4
Joined: Mon Apr 12, 2021 10:52 am

Re: Defined Benefit Pension Plan

Post by pbx1 »

Thanks for the overwhelming feedback and tips. My wife and I are both 35.

$210,000 a year salary for myself (average going pay for the position)
$52,000 a year for my spouse so we will have to rightfully increase that.

Got absolutely killed in taxes this year while doing everything we thought we should be doing, but guess not. Will be aggressively looking into this benefit plan.
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Defined Benefit Pension Plan

Post by Rex66 »

You should wait on it at that age

Everyone in this situation pays a lot of taxes

As they say, good problem to have

Max out your defined contribution plans

Build up an after tax account

In 10-15 years then start one
Rex66
Posts: 2955
Joined: Tue Aug 04, 2020 5:13 pm

Re: Defined Benefit Pension Plan

Post by Rex66 »

Shalom Aleichem wrote: Mon Apr 12, 2021 8:59 pm
Rex66 wrote: Mon Apr 12, 2021 8:53 pm
Shalom Aleichem wrote: Mon Apr 12, 2021 8:48 pm
bsteiner wrote: Mon Apr 12, 2021 8:47 pm There are ways to use the overfunding. Survivorship pension for spouse. Employ children and give them minimum pension allowed regardless of their salary. Sell the business with the plan to a buyer whose plan is underfunded.
Thank you!

Yes I thought of that. No spouse currently. Add spouse once I get one. Kids are young enough not really feasible yet. Both are my plan for the future. Including getting a spouse. But getting a spouse plan isn't working as well as I'd like.
This isnt an easy work around either bc you have to pay them a salary and benefits in conjunction with the plan. Trying to find a buyer who wants to buy and is underfunded but has the money to buy your business at a good price......
One daughter who wants to go into the field so ... she could become an employee and eventually just take over the practice with whatever remains of the funds. It seems to me the best option with no future questions is take out maximum annual salary until the fund is small enough to take the lump sum. After that is add spouse and kids. After that is - if daughter wants to work in the same or similar enough field have her take over that would include the funded DB. Either way, as long as there is no committing more funds to the plan, all things being equal, I would rather have to make decisions with too much money in it rather than too little!
You should ask your tpa for the amounts he or she thinks will fly for closing the account per year after starting your withdrawal plan. There are two ways to close a plan. One in essence gets an official blessing but costs more. There have been plans that have closed bc the business goes under but I believe (don’t know or even how to truly know) of anyone able to be in the distribution phase but then also get the total lump sum.

You need to remember that if they find you in violation they go back and reject all your deductions. It wouldn’t just be taking the extra at that point. Your taking a risk that I don’t think you have accounted for.
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