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  • Defined benefit programs

    Hello, I have done a lot of reading today through WCI/Physician on Fire/etc and have done my best putting the pieces of the puzzle together.

    My CPA (physician only clients) recommended I look into a defined benefit program. I have read and read and read on this and it seems to be complicated because of fees involved that may not be transparent and.

    Any recommendations as to who would be a good choice to start looking at for managing this for my S-Corp LLC. My significant other and I are the only two employer/employee on this LLC. I read through WCI and Schwabb/Ameritrade were thrown out there. The benefit in this I see is the tax free growth and tax deduction and as the employer and employee, it seems this would be a way to knock down our tax bills even further.

    Thank you for any help/clarity.

     

  • #2
    Great question.  The first thing you will want to do is educate yourself about Defined Benefit/Cash Balance plans.  Typically, this plan is added to an individual 401k to maximize your contribution.

    There are several key conditions that need to be met:

    1) How long do you want to run this plan for?  Ideally you'd want to run this for at least 5 years (anything less and you might risk being audited by the IRS).

    2) Do you have a relatively high steady income?  If you are an S-corp, you'll need to have a W2 of $270k to max out your contribution, AND you need at least $400k or more in net profit (more if you are older and want to make a larger contribution).  If your income changes a lot you will have trouble maintaining this type of plan.

    3) Are you at least 35 years old?  Anyone younger won't benefit from this type of plan, and ideally you'd want to be about 15-20 years to retirement to get the most benefit out of this.

    4) How much would you like to contribute?  Chances are that together with a spouse you can contribute up to $106k into an individual 401k.  For a DB/CB plan to make sense you need to contribute significantly more into both plans (or at least double what you can contribute into a 401k plan alone).  This won't be possible if you are too young.

    5) Who will be handling investments?  Typically a CB plan will have more conservative investments, so you will need to coordinate your investment strategy between both plans.  Unless you know exactly what you are doing and are an expert on investment management, it would be a good idea to hire a flat/fixed fee adviser/fiduciary to oversee the investment management for both plans.

    This is not a DIY plan and requires close coordination between your CPA and your plan adviser/TPA/actuary. Schwab provides administration and record-keeping, but nothing else, and I typically recommend working with a standalone TPA because there are many moving parts, so the quality of advice will be more than worth it.  Also, I would not recommend using Schwab or any other discount broker.  A typical plan architecture includes a TPA, an actuary (typically working behind the scenes with a TPA), an adviser/fiduciary and a record-keeper.  Of all of the roles described, only the adviser in a fiduciary capacity can provide you with honest/fiduciary advice, while everyone else has no fiduciary duty to make sure that you are getting the right plan that fits your specific situation.  The tail should not wag the dog: while taxes are important, this type of plan is too complex and has to be examined as part of your overall financial situation, as it should work for you going forward, not just for a year or two.  I see too many docs wanting to close their CB plans because they were literally sold to them by plan providers without considering their entire financial situation, and this can end up being a costly exercise if proper planning is not done.

     
    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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