Does Personal Defined Benefit Plan make sense for young attending given income?

[JK]

Relatively new attending at 32 yo. I've been reading WCI for awhile and it seems that defined benefit plans are NOT a good option for young attendings due to lower contribution limits, higher costs to maintain, multiple competing needs for your money, etc... All of that makes sense to me but by and large, I have my "financial house in order", and am wondering if it makes sense in my unique situation. Some info

-32yo Female, married. 1 kid. Another one in next few years

-Net Worth: ~300k

-Anticipated 2019 income: 550-750k all 1099 money

-Student loans: none

-Mortgage: none. We only rent and will do so for next 1-3 years. Anticipated house purchase (when the time is right) 500k-1million

-Currently maxing all tax-deferred space with i401k (56k), HSA (7k), Backdoor Roth x 2 for me/husband (12k), 529 contribution up to max state tax deduction (10k) = 85k in total

 

I took at look at Schwab's Personal Defined Benefit Plan (https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/personal_defined_benefit_plan) and it seems like a no brainer but I'm likely missing something. At my age, I know the the contribution limit is lower (from what I could find online 50-60k but please correct me if wrong) with an initial setup fee of $1,500 and annual fee of $1,500. Given my high income, I would max out the amount of available space. It seems that if the tax savings on 50-60k > 3k (year 1) or 1.5k (subsequent years), then it makes sense.

The other competing interests for that money could be....

-Taxable every month (5-20k/mo)

-Save up for house down payment even though 1-3 years away

-Front load 529 (~70k)

-Real Estate acquisition (not my cup of tea at this time)

Just curious what other people would do in a similar situation and where they would invest the money.

 

[DMFA]

Def worth looking into.  You should have a pro draft a Cash Balance Plan specific to you since its contributions are more similar to defined contribution plans like 401(k), e.g. pay credits done as a percentage of compensation (e.g. 10%) instead of a more "black box"-like formula for classic DBPs.  As you've said, esp since you look like you're squarely in 37% (at least 35%), tax deferrals are worth a lot.  It would be a worthwhile expense for design imo, then you have the exact info needed to decide whether or not to do it.

[caprivenky]

@jk

‘you should start a CBP . It will defer taxes on at least 55k .

recently a friend who is 55 is enrolling in it . He said that the fees is around 1%of annual contribution .

mostly these plans are done by people after their 50s- you are starting young and will be running the plan longer - ask them to lower their fees.

‘Also if you can get your taxable income between 315k-415k - you may also be eligible for the 20% QBI deductions .

‘You have to open account before dec 31 for 2018 .

[litovskyassetmanagement]

JK wrote:

Relatively new attending at 32 yo. I’ve been reading WCI for awhile and it seems that defined benefit plans are NOT a good option for young attendings due to lower contribution limits, higher costs to maintain, multiple competing needs for your money, etc… All of that makes sense to me but by and large, I have my “financial house in order”, and am wondering if it makes sense in my unique situation. Some info

-32yo Female, married. 1 kid. Another one in next few years

-Net Worth: ~300k

-Anticipated 2019 income: 550-750k all 1099 money

-Student loans: none

-Mortgage: none. We only rent and will do so for next 1-3 years. Anticipated house purchase (when the time is right) 500k-1million

-Currently maxing all tax-deferred space with i401k (56k), HSA (7k), Backdoor Roth x 2 for me/husband (12k), 529 contribution up to max state tax deduction (10k) = 85k in total

 

I took at look at Schwab’s Personal Defined Benefit Plan (https://www.schwab.com/public/schwab/investing/accounts_products/accounts/small_business_retirement/personal_defined_benefit_plan) and it seems like a no brainer but I’m likely missing something. At my age, I know the the contribution limit is lower (from what I could find online 50-60k but please correct me if wrong) with an initial setup fee of $1,500 and annual fee of $1,500. Given my high income, I would max out the amount of available space. It seems that if the tax savings on 50-60k > 3k (year 1) or 1.5k (subsequent years), then it makes sense.

The other competing interests for that money could be….

-Taxable every month (5-20k/mo)

-Save up for house down payment even though 1-3 years away

-Front load 529 (~70k)

-Real Estate acquisition (not my cup of tea at this time)

Just curious what other people would do in a similar situation and where they would invest the money.

 

Click to expand...

I don't think CB plans make sense for 32 year olds in most cases.  This is because your 401k contribution will be limited to 6% for profit sharing, so your total contribution will be about $97k, out of which about $60k goes into the CB plan.  While this might seem like a lot, consider that your lifetime maximum is about $3M, and the later you do this plan, the more you can put away.  If you start a CB plan as a 32 year old, you will 'max out' at about $1M, in 10 years.  If you start this plan as a 42 year old, your 10 year maximum is closer to $1.7M.  The biggest bang for the buck is $3M over 10 years for a 58 year old.

That said, if you don't anticipate your 1099 income to last more than 10 years, a CB plan might make sense.  However if you plan to have this high level of income in the future, delaying CB plan might also make sense.  If you are planning an early retirement, an early CB can make sense as well.  So you have to weigh pros and cons on this one.

There is no issue as far as delaying - all you are doing is investing after-tax/solo 401k first, and doing CB plan later, so if anything you are not missing out, and will benefit more in the future (especially if taxes go up).  So as long as you have income stability, delaying a CB plan can be a sound decision.  There is definitely a risk to doing this, thus it is not a simple decision to make.

I would be very careful with Schwab.  They are not a fiduciary, and someone already posted that they gave him a 25 year plan, which is just wrong.  Basically his CB contributions are so low over 25 years, that he might as well just do the solo 401k plan for 15 of those, and do a CB plan over 10 years instead and avoid paying them 15 years' worth of fees. So make sure you understand what a CB plan is and what an appropriate plan design is for someone like yourself, because Schwab would do anything to get you signed up.

Also, in most cases you can't have a 'solo 401k' product and a CB plan as well. Both plans have to be administered by an actuary, and will require coordinated custom designed plan documents so that would definitely increase the cost Schwab is charging. For what they are charging you can already hire an independent actuary rather than a big mill, and get better quality designs that fit your specific situation.