Setting up a DBP??

[SValleyMD]

Im one year out and need to set up both a solo 401k and a defined benefit plan?

My accountant states these need to be "set up together" and that he'll contact someone he works with to do both. Not sure if I trust my CPA quite yet.

I was curious how others set up their DBP and if there are any companies that people would recommend...

Thx--

[Scott at MD Financial Services]

If you are 1 year out of training and you are being suggested to set up a Defined Benefit Plan then I would question that unless you are much older than the typical resident.  DB plans are typically most beneficial once one hits age 50 or more since the contributions can wildly exceed the contribution limits of things like SEP, Cash Balance, 401k, profit sharing and the such.

[SValleyMD]

Good point. I was the one who was pushing it from what I've read on here from Jims blog on high paying docs.

I'm a rural specialist in a 1099 situation. I made 800k this year but expected to hit 900k-1.1 this year. Contract changes in 18 mo, but I suspect I should be in 700k plus range for the near future.

This year I used that to build up 25% down for a home and to pay off my student loans. I have one car loan at 35k (bought before I found this site) that I hope to pay off by the end of the year.

Otherwise I won't have any other debt but I also don't have any past savings.

In this type of scenario would a DBP be reasonable??

[Scott at MD Financial Services]

Nice job on the accumulation for a house down payment and Student loan funeral!

How old are you?  I have typically found if you are not 48-64 then a DB plan is hard to make work since there just is not enough delta between a SEP and doing a DB plan to justify the cost of establishing a DB plan and running it through a Third Party Administrator (TPA).

The mechanics of a DB plan are:

1:  Benefit to be paid out (defined benefit amount)

2:  Years until payout happen (accumulation period, the more time you have for the assets to accumulate independent of contributions and not be fully made solely up of your contributions)

3:  Assumed rate of return (You can make really low assumptions but then each year you have to account for the actual performance so the better you do the lower your contributions since you are getting closer to the project number needed to provide you a 'defined benefit', don't get me wrong you do NOT want to have bad performance to simply get a larger deduction).

Once you know those three then you can come up with an annual contribution which is tax deductible.

[SValleyMD]

Age is 36.

Looks like I need to do my homework! I'll try and get more information as it looks like I need to think this through more. Appreciate your help-

[Zaphod]

Yes, in your situation its totally reasonable, and in only a couple of years you'll have well over 6 figures of deductible contributions. Everyone says its so terrible to start when not older, but really for those with enough income it makes all kinds of sense. It can grow longer and if lucky you end up making less contribution and compounding hits your max, and lets not forget that you can cancel the plan after a time and roll it over to a regular 401k/etc....

The financial folks on here cant even allude to the above it seems, but really thats a huge benefit imo (even wci has done this).

Only issue for yourself, which is great, is youre likely to have massive tax deferred accounts and might want to strategically have an end sum in mind between deferred/taxable, etc...

[jfoxcpacfp]

Rex makes a good point.

Consider some financial planning with a fee-only CFP. What you are attempting, in essence, is to choose the building materials for the house you'll live in the rest of your life before having the house plans drawn up.

[litovskyassetmanagement]

SValleyMD wrote:

Age is 36.

Looks like I need to do my homework! I’ll try and get more information as it looks like I need to think this through more. Appreciate your help-

Click to expand...

It is 100% wrong to say that DB plans only work for those over 50. The numbers are indeed very different if you have employees vs. if you don't, and in some cases only older practice owners with employees would benefit from a DB plan.  But you can be as young as 36 and a DB plan can make a lot of sense for you, depending on multiple factors. There definitely are limitations.  For one thing, if you open a DB plan early, you will most likely max it out within 20 years or sooner (there is a lifetime maximum contribution of about $2.5M), so it might not be advantageous to open this type of plan this early in the game.  On the other hand, if you plan to retire earlier (or if you ever get a W2 job), this might be ideal for you.  So for one person this type of plan might be a bad idea this early on, but for others it might be the best idea available to shield significant amount of money from taxes.  Most of the plans we set up are for those closer to 40.  Many high earning doctors won't be working past the age of 55, so in that case a DB plan is ideal.  Another way to get a higher contribution is to add your spouse to the payroll (as an employee).  Another limitation to starting a plan early is the 6% profit sharing cap.  So instead of contributing $53k into a solo 401k, you will contribute $18k plus 6% profit sharing for a total of ~$40k, and the rest would be your DB contribution.  As a 36 year old, your DB contribution can be about $65k (including the 6% profit sharing).  So your total contribution might be around $84k or about $30k higher than just the solo 401k contribution.  Might not make a big difference if you are 36, but your maximum contribution grows with age, so that's why at age 38 the numbers make a lot more sense.

In any case, it is worth looking at the numbers and deciding on whether this approach makes sense.  You need to have a steady income, and ideally you want to pay yourself with a W2.  A combo plan is a perfect solution for young self-employed doctors who are at least 36 years old, and this is coming from a fiduciary adviser who's not compensated based on assets, so unlike all of the advisers who are dreaming to get your DB plan because it is a pile of billable assets to them, my interest is in delivering the best solutions for doctors and dentists, and this just happens to be a great solution.  A combo plan can be opened at Vanguard, and it would require two accounts and two plan documents.