Switching defined benefit plans at 50 to optimize pre-tax savings

[RosieQ]

I'm wondering if anyone can share some insights into the nuances of defined benefit plan limits. My current partnership group allows a contribution of up to 30k per year into our defined benefit plan. However, if you are incorporated then you can instead elect to contribute to your own defined benefit plan. Would it be possible to contribute 30k per year for a while into the group plan, and then once I reach 50 years old or so switch to my own DBP that would allow more than 200k per year in contributions? I'm in CA so the extra tax savings would be much appreciated if that were to be possible.

[litovskyassetmanagement]

RosieQ wrote:

I’m wondering if anyone can share some insights into the nuances of defined benefit plan limits. My current partnership group allows a contribution of up to 30k per year into our defined benefit plan. However, if you are incorporated then you can instead elect to contribute to your own defined benefit plan. Would it be possible to contribute 30k per year for a while into the group plan, and then once I reach 50 years old or so switch to my own DBP that would allow more than 200k per year in contributions? I’m in CA so the extra tax savings would be much appreciated if that were to be possible.

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The answer is no, you can't open your own DB plan unless you have independent source of income.  It sounds like you have a 'canned' CB plan design.  We typically have custom-designed CB plans that allow each doctor to specify their contribution amount up to the legal limit based on their age, salary, etc.  So the only way to remedy this would be to redesign the CB plan.  Some TPAs may be too lazy to do this, so that's why they limit contribution amounts to a fixed number.  There may be other reasons why CB contribution is capped, so we would have to take a look at the current plan design and determine what the cost-benefit of allowing each doctor to set their individual CB contribution limits would be.

[litovskyassetmanagement]

Rex wrote:

Focusing on contributions is typically wrong.

You should focus on the benefit.

If you are getting the maximum which is around 2.6 million (215k per year) at retirement then that’s the max you can get.

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Good point, I assumed that their plan does not allow maximum possible contribution, and it would take a very long time with a $30k contributions to max it out.  I also assumed that OP wants to max out her CB plan over a short period of time.

In any case, a CB plan that does not allow maximum contribution possible is not a good plan for a group practice because nobody wants to wait for 20-30 years, it does not help very much with getting the highest possible tax deduction (esp. in CA), and someone older will definitely want to contribute a lot more than $30k.  Custom-designed plans are always best - if someone wants to wait 20-30 years to max out their plan - so be it, but one should be able to max it out in 10 years if they want to.

[RosieQ]

The issue is that I'm currently 33 years old. So a "canned" benefit plan with a cap of 30k per year will still get me to the same place with 2.6 million or so. I am in CA with high taxes, so the 30k in tax reduction off earned income is attractive. However, the ability to have very large contributions for 10 years or so would be even better, but likely wouldn't be as much of an option with a DBP until later in life.

Any general suggestions on whether I should take the plan as it stands, or minimize contributions (minimum is 2,500 per year), or skip it altogether in favor of being incorporated and then start my own contributions into a self designed plan at a higher rate at a later time?

[litovskyassetmanagement]

RosieQ wrote:

The issue is that I’m currently 33 years old. So a “canned” benefit plan with a cap of 30k per year will still get me to the same place with 2.6 million or so. I am in CA with high taxes, so the 30k in tax reduction off earned income is attractive. However, the ability to have very large contributions for 10 years or so would be even better, but likely wouldn’t be as much of an option with a DBP until later in life.

Any general suggestions on whether I should take the plan as it stands, or minimize contributions (minimum is 2,500 per year), or skip it altogether in favor of being incorporated and then start my own contributions into a self designed plan at a higher rate at a later time?

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Yes, at 33 you should be able to put away as much as you can, and you should max out your CB plan.  You can have multiple CB plans over your career, and the $2.6 million applies to a single plan.  If you have 1099 income from an unrelated source (or join another practice), you can have another $2.6M available to you, so maxing out your CB plan now is always the best course of action.  You can participate in two CB plans at the same time if you also happen to have another 1099 income right now.  Even if you max out your own plan when you are young (and it won't be nearly $2.6M), you can restart the plan later on just prior to retirement.

If your source of income is the practice, you can't start your own plan unless you have an unrelated source of income.

[litovskyassetmanagement]

Rex wrote:

Depends on who is paying for the plan and your thoughts about longevity with company and if it’s really feasible to get other 1099 income or if you think you can convince the group to modify/change their current plan.

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Maximum allowed CB allocation for a 33 year old is actually $56k, and it increases every year by about $3k-$4k, so I would definitely suggest redesigning the plan to allow for maximum possible amounts.  Also, with PBGC plans they can make full $54k 401k contributions on top of the CB contribution, so that's a maximum of $110k, which is not bad at all.

[litovskyassetmanagement]

Rex wrote:

Right but in the end he gets the same defined benefit so need to see if he can change the groups plan. Not always easy to do. If it’s a huge hurtle and really believes he will be there until retirement then not worth the battle.

Putting in morein total over all your years just means you paid more for the same benefit. I’m hoping to be forced into year contributions. Even if taxed at 50% that’s still 50 cents more in my pocket for every dollar less contributed.

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Absolutely.  I hate those  fixed $ designs.  They are either created by lawyers, or by very lazy TPAs. I bet it can be easy if a handful of partners raise up the issue.  I find that group practices are often democratic so younger partners have as much say as older ones, so this is how older plans can be improved - just takes a single squeaky wheel.

Also, I simply don't trust those who manage CB plan investments for group plans.  They have no idea how to do liability driven investing, so those portfolios are always riskier than they have to be.

[litovskyassetmanagement]

Rex wrote:

Right but in the end he gets the same defined benefit so need to see if he can change the groups plan. Not always easy to do. If it’s a huge hurtle and really believes he will be there until retirement then not worth the battle.

Putting in morein total over all your years just means you paid more for the same benefit. I’m hoping to be forced into year contributions. Even if taxed at 50% that’s still 50 cents more in my pocket for every dollar less contributed.

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So for example, if OP was an employee, everything is golden - the longer, the merrier.  But if they are a partner and the plan is significantly underfunded because the portfolio took a dive (and senior partners cashed out), well, then that's a whole other story.