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  • #16




    I dont doubt those points, and evaluating is of course prudent. I also bet if you have a full practice and employees it can be extremely complex. The committed nature is certainly more concerning than otherwise, mostly as if there is some sort of economic calamity and you cant quickly reallocate to whatever asset has been demolished, aka housing in the last one. That does concern me.
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    Right, practices with employees have to be especially careful and not jump into something like that without serious analysis.  Termination fees at some TPAs might be as high as $10k (from what I saw before), so you have to find out what it would cost to terminate a plan as well.  Also, doing multiple plan redesigns will add administrative cost (and this might be required if things go out of hand).  My recommendation is to plan things out well beforehand and understand the extent of your liability, and to have a very clear goal.  The great thing about these plans is that they save you a lot of taxes, so if done by the book, you can have a stash worth at least $2.5M that you can then roll into your solo 401k or an IRA, and then proceed to do such things as in-plan Roth conversions, etc.  A DB plan is nothing but a tool to help you achieve your goals, so it always helps to look at it as part of your overall investment plan.
    Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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    • #17




      No different then if 10 years from retirement with 401k except you aren’t given the ability to catch up like you are with DB plan.

      I’ll say age 40 as young since that’s what is usually posted here.

      You don’t seem to recognize your low volatility approach will DEFINITELY cost the person much more as opposed to your doomsday approach most of the time. You also seem to forget plans can be altered to reduce the benefit. You don’t recognize how having years of no required contributions allow more to go to your DC plan.

      Bottom line is that avoiding stocks and absolute no volatility in a DB plan is Just flat out not true. The real difference is that one needs to understand that at plan closure, it needs appropriate funding and that is different then in retirement when you have more years to iron things out.
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      We will agree to disagree.  You can do what works for you, and that's fine. I'm the one who takes full responsibility for other people's money, so I can't use wishful thinking and overconfidence to manage investments in these types of accounts.  There are simply too many moving parts, and hoping that everything lines up just right is not an option, so we have to use the most conservative approach as long as it fits within one's goals.  Having no volatility in a DB plan and more stock exposure in a 401k plan will be more than adequate for 99% of docs who want a combo plan.

       
      Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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      • #18




        I seriously doubt you back the investments so full responsibility isn’t worth much.

        99% of the time my approach will have a lower cost for the DB plan and more money in the DC plan. Hopefully you polish your statements why you are so pro no stocks in a DB plan bc as people become more educated it’s going to be difficult to defend in the young with few to no employees. It’s funny you think you don’t use scare tactics.

        It’s not that complicated no matter how much you want others to believe it is. For investing use low cost index funds and rebalance yearly. The DB plan only gets recalculated yearly as well. The ideas behind it don’t have too many moving parts. It’s pretty easy to add stocks but just like stocks in 401k or whatever you just need to understand why the return is likely higher.
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        I'm glad you are an investment pro, but most of those who come to WCI are not. There are two separate questions here.  One is why the DB investments for solo plans should be primarily fixed income.  I've discussed reasons for that above. Whether someone wants to kick in more some of the time or take a smaller deduction some of the time is an individual choice, and changing the plan document every year will definitely be a red flag for the IRS (and your TPA wouldn't recommend it).  So it just comes down to what's the most prudent thing to do.

        That's separate from having a low volatility overall portfolio. To address that question, the bottom line is that you absolutely do not have to take excessive risk if your savings rate is high enough (which will be different for everyone).  The trade-off is rather simple: shoot for a 10% return but get 5%, or shoot for 5% and get 5% but save more.  Which approach do you think will work better to manage your long term risk?

        The two attached charts show the reality of trying to getting in and out of the market and of getting historical average returns over the long term.  Implying that high exposure to stocks will guarantee higher return than a more balanced approach is not supported by actual market data.  It might, and it might not.  It is a lot more prudent to save more and risk less.

        And before we get into 'risk decreases with time' argument, here's some background on why the opposite is true:

        http://www.norstad.org/finance/risk-and-time.html

        'Invest in index funds and re-balance annually' is too simplistic without many other aspects of investing (such as risk management, asset allocation, diversification, tax planning, understanding the difference between contribution and distribution phases, understanding how to use retirement plans, etc.), and without some experience this is not something that an average investor without adequate training would be able to do without major mistakes.  That said, I highly recommend that anyone who wants to invest on their own should educate themselves.  The worst enemy of many investors (especially doctors and dentists) is overconfidence in their abilities and in the quality of their knowledge.

         
        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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        • #19
          Before making blanket statements about things, it would help to qualify that everyone's situation is different, and each DB plan should be designed to fit (and be managed) like a glove, so something that would work for one person will not work for another.  The sole purpose of a DB plan is to provide a tax deduction for as long as possible, and using all bonds will help one do exactly that.  You are not losing out on anything while doing this - the plan will not last more than 15 years or so, and the money can then be rolled into a solo 401k and be invested as needed.

          I never said one should avoid all stocks - just limit one's exposure to stocks.  In fact, most people understand that risk management is more important as the amount of assets invested grows.  So if anything, one should decrease stock exposure as the amount of assets increases.

           
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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          • #20
            We seemed to have gotten off the topic of the original title of the thread...can someone please discuss the pros/cons of a CBP vs. a DBP?

            Or stated another way, which situation(s) would favor a CBP over a DBP?  We are a group of 4 physicians with 6 NHCE's trying to decide which may be better for our group.  Thank you.

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            • #21


              We seemed to have gotten off the topic of the original title of the thread
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              This thread is over 3 years old!

              Comment


              • #22




                We seemed to have gotten off the topic of the original title of the thread…can someone please discuss the pros/cons of a CBP vs. a DBP?

                Or stated another way, which situation(s) would favor a CBP over a DBP?  We are a group of 4 physicians with 6 NHCE’s trying to decide which may be better for our group.  Thank you.
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                Actuaries these days seem to prefer CB plans.  I'm attaching an article from the actuary that details the differences.  CB plans are much easier to understand for participants vs. DB plans, and internal workings of of CB plans favor them over DB plans.  There are no pros for DB plans over CB plans from what I can tell, CB plans are just better all around in terms of plan design, termination, lump sum distribution, and portfolio management.  There's a good amount of detail on CB plans here:

                https://www.whitecoatinvestor.com/cash-balance-plans-for-solo-and-group-practices/

                 
                Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                Comment


                • #23





                  We seemed to have gotten off the topic of the original title of the thread 
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                  This thread is over 3 years old!
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                  Yes, but enquiring minds still want to know! 

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                  • #24
                    Kon - Was wondering if I can do a CB or DB earning 1099 income as a dentist, and once I max out under my LLC, close it down and then possibly start a new CB / DB under another LLC if I do something else as a 1099, say teach?  Does that count as a separate employer, or is it all just me, even if the work I am doing in the 2nd LLC differs from the work I did in the 1st LLC?

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                    • #25




                      Kon – Was wondering if I can do a CB or DB earning 1099 income as a dentist, and once I max out under my LLC, close it down and then possibly start a new CB / DB under another LLC if I do something else as a 1099, say teach?  Does that count as a separate employer, or is it all just me, even if the work I am doing in the 2nd LLC differs from the work I did in the 1st LLC?
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                      Why don't you just do those different jobs as a 1099 under the same LLC?  If your income is steady enough and it makes sense to do a CB plan then it would work much better for you to have one LLC and one CB plan.  My understanding is that you want to run the CB plan for at least 3 years and maybe more in order to avoid problems with the IRS.

                      If you own more than one business you are subject to controlled group rules which means that you can't simultaneously run retirement plans for different business you own all or most of.  Again, opening and closing LLCs and CB plans in succession sounds like a mess and probably not in keeping with rules that govern CB plans.

                      Hopefully Kon will weigh in since he definitely does know his way around CB plans.  CB plans are great.  Put as much in as you can, run the plan for a reasonable period of time, then roll it into a 401k/IRA and let it grow.  Do roth conversions down the road as appropriate.  One of the best tax minimization strategies out there.

                      Comment


                      • #26




                        Kon – Was wondering if I can do a CB or DB earning 1099 income as a dentist, and once I max out under my LLC, close it down and then possibly start a new CB / DB under another LLC if I do something else as a 1099, say teach?  Does that count as a separate employer, or is it all just me, even if the work I am doing in the 2nd LLC differs from the work I did in the 1st LLC?
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                        No, you are still the employer. Just setting up different LLCs will not work.  If however you join a partnership, that would be a different employer since you are not 100% owner of both.  This is similar to a controlled group (I bet that determining whether this is the same or different employer for retirement plan purposes would use controlled group rules).
                        Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                        Comment


                        • #27







                          Kon – Was wondering if I can do a CB or DB earning 1099 income as a dentist, and once I max out under my LLC, close it down and then possibly start a new CB / DB under another LLC if I do something else as a 1099, say teach?  Does that count as a separate employer, or is it all just me, even if the work I am doing in the 2nd LLC differs from the work I did in the 1st LLC?
                          Click to expand…


                          Why don’t you just do those different jobs as a 1099 under the same LLC?  If your income is steady enough and it makes sense to do a CB plan then it would work much better for you to have one LLC and one CB plan.  My understanding is that you want to run the CB plan for at least 3 years and maybe more in order to avoid problems with the IRS.

                          If you own more than one business you are subject to controlled group rules which means that you can’t simultaneously run retirement plans for different business you own all or most of.  Again, opening and closing LLCs and CB plans in succession sounds like a mess and probably not in keeping with rules that govern CB plans.

                          Hopefully Kon will weigh in since he definitely does know his way around CB plans.  CB plans are great.  Put as much in as you can, run the plan for a reasonable period of time, then roll it into a 401k/IRA and let it grow.  Do roth conversions down the road as appropriate.  One of the best tax minimization strategies out there.
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                          Yes, that's possible, not all employers want to pay to an LLC, some want to pay to an individual, so that can sometimes come up, but having all of your 1099 income going to a single entity that adopts the plan is the right way to increase your income for CB plan purposes.  Longevity is an issue, so I wouldn't start a plan unless you want to run it for as long as you can at maximum contribution (ideally 10 years).

                          You are exactly right about controlled group rules, they apply here as well.

                           
                          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                          Comment


                          • #28
                            Hi Kon - Sorry, I should have been clearer, what I meant was if I max out my CB for the next 10 years (I'm 38) as a dentist, then decide to teach at age 50, for example, can I open another LLC and do a new CB plan for my teaching income?  IE can I max out my lifetime cap for my dental income and then later (not simultaneously, with a few years gap), open ANOTHER plan and have a 2nd lifetime cap?  In both LLCs I would be the sole prop owner.   Do I count as the same employer, no matter what kind of business I am running, or do I count as a different employer as long as the service I am offering is different from the first one and not being done at the same time?

                            Thank you for your help on this!

                            Comment


                            • #29




                              Hi Kon – Sorry, I should have been clearer, what I meant was if I max out my CB for the next 10 years (I’m 38) as a dentist, then decide to teach at age 50, for example, can I open another LLC and do a new CB plan for my teaching income?  IE can I max out my lifetime cap for my dental income and then later (not simultaneously, with a few years gap), open ANOTHER plan and have a 2nd lifetime cap?  In both LLCs I would be the sole prop owner.   Do I count as the same employer, no matter what kind of business I am running, or do I count as a different employer as long as the service I am offering is different from the first one and not being done at the same time?

                              Thank you for your help on this!
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                              No, that's the whole point.  Even if your entities are opened at different times, they still form a controlled group. It has to be a different employer. Otherwise you can just open unlimited number of CB plans by just changing entities every 10 years. So you are probably better off waiting to open a CB plan until later (maybe about 10 years to retirement to make it count).  Also, I doubt you'll make enough from teaching to contribute much to a CB plan.  You can still do a solo 401k plan though if you make enough from teaching, and also employ your spouse (which increases your contribution).
                              Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

                              Comment


                              • #30
                                Thank you Kon.  One last question - I noticed you referred to being able to put in more than the 6% PSP if the group payroll is less than 31%.  Does this apply for a Solo LLC, ie if I claim $600k in W-2 income through my LLC (taxed as an SCorp) - understanding that the max that can be counted for CB is $280k - I can put in something like $87k CB + $36k PSP, so that's $123k.  Since 31% of my $600k income is $186k, does that enable me to put in another $20k to bring the total 401K contribution to $56k?

                                 

                                2nd question - any reason not to put my W-2 at $600k?  I know I have to pay an additional 2.9% Medicare tax + 0.9% Obama tax over $200k (Social Security caps out at $132,900).  So my additional FICA tax is only 3.8%, and if I am getting a 6% PSP contribution (or more, if I can use the 31% payroll rule), then it makes up for the additional FICA, correct?

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