Bloomberg articles on defined benefit plans

[caprivenky]

https://www.bloomberg.com/amp/news/articles/2018-08-15/rich-professionals-barred-from-tax-break-find-pension-painkiller

[caprivenky]

Need advice from the docs in this group who participate in DBP.

i have been thinking of this for last couple of years , but could not commit myself to take a plunge .i am a solo practitioner surgeon

1. How many years minimum do have to run this plan

2. Contributions for the office staff - is their a waiting period , before they become eligible

3. The costs in article to set up and run appears high to me . The manager running my office plan 401k ( 1000$/ a year ) offered to do this  at an additional cost of 1500$

 

Thanks

Ven

[Crazyroadtodublin]

Good morning,

 

Not an expert on this but had a plan for 2 years then stropped it.  The staff has to be in the plan from day one but you can vest their benefits over time.  The plan does cost some money to start/maintain.  These plans are far more beneficial if your 55 as opposed to 35.

 

Cheers

[WCInovice]

Our group of sub specialists uses a DBP in addition to our safe harbor 401k. Partners contribute between 40-100k/year to the DBP. The actuary/accountant helped set it up and give us our “goal” annual yield to be within whatever terms the IRS allowed, which was pretty low at ~2-3%.

Our group wanted very low risk within the DBP assets, so they’re mainly in high grade corporate bonds, CDs, etc that in theory will grow with minimal risks .

We run the plan for about 5 years then rest for a couple of years (let’s retiring partners exit without muddying the waters), then re start.

It was never our intention to run the DBPto get our taxable below the income threshold to get the new tax benefits as outlined in the article. We’re still going to be over that threshold when most of us just contibute 50k to the plan. Maybe we should have done more but that’s a chunk of money growing at low rates and may do better with equity/real estate.

There is a very knowledgeable poster here (excuse the attemp at spelling) named Kon Livotsky that has some good posts on these plans.

[Hatton]

Remember tax-deferred is not tax free.  At some point taxes will be due.

[grp2c]

Another poster on this forum and I hired Pinnacle last year.  I'm very happy so far.  I setup a defined benefit + solo 401k combo which allows the mega backdoor roth.  Large pretax deductions will get me under the threshold for the 20% pass through business deduction for 2018.  They also specialize in cash balance plans if that interests you.

 

https://pinnacle-plan.com/

[pmj78910]

Our practice has also been using a DBP for many years. Overall, we've been very happy with our decision and it's a great way to make large pretax contributions in addition to our 401K.

One of the issues that originally caused a lot of contention was how the money was invested. We had a few "risk takers" who wanted a very aggressive allocation. These were people who were 100% equities and couldn't stand to have any of their money in a less risky portfolio.

However, with DBP, using a more aggressive allocation could put the plan at risk for underfunding during a downturn. Ultimately we decided that the only way we would proceed was to use a very safe bond heavy portfolio with minimal returns. Personally, I just add this to the fixed income portion of my overall portfolio which allows me to be more aggressive with my non-DBP investments. My overall asset allocation has not changed.

[DMFA]

DBPs can be excellent, or they can be the wrong choice for the high fees they require for regulation.  The biggest "earning" you will get from them is the tax deduction on the contributions, since these are very usually top-bracket.

Earlier-career earners, such as before the mid-40s, generally don't/shouldn't/can't contribute much to DBPs because:

• Contribution limits are based on actuarial tables and as such are lower for younger employees


• There is a lifetime contribution limit


• There are annual benefit maximums which might be reached with more years of lower contributions (and hence less tax advantage gained)


• May be in a lower bracket than future contributions would be once one earns more


• Annual fees are high (less years paying them can be better if you have to pay them, such as self-employed)


• They don't earn as much as other accounts since they have to be structured to guarantee the defined benefit and as such tend to utilize lower-volatility (i.e. lower-earning, p much) fixed-income holdings like bonds, treasury bills, cash, etc, often around 3-5%, so compounding over time may not matter as much


• The IRS can challenge a retirement age less than 62, so if you're trying to do FIRE, the design/testing of your plan may not match up with this

Later-career earners, such as mid-40s or afterward, should be very attracted to DBPs especially if they can keep future taxes low:

• Contribution limits can be very high - often in the hundreds of thousands of dollars - worth a lot at top brackets


• Lower volatility of holdings can be more consistent with the portfolio of one near retirement age (higher fixed-income or cash proportion)


• Unlikely to be at a higher earning bracket

hatton1 wrote:

Remember tax-deferred is not tax free.  At some point taxes will be due.

Click to expand...

Yep.  And if you're deferring away $300K at 32-37% brackets, you can end up with a pretty high annual defined benefit, which is of course taxable.  Depending on your other retirement investments, you could easily find yourself in 24-32% marginal...although this would likely put you in high teens to low 20%s effective range, assuming you've been fairly tax-efficient, still making top bracket deferrals worthwhile.  You can do Roth conversions in a fill-the-bracket strategy (also taxed, though) to reduce the RMDs of other plans, or even the DBP, but you're still on the hook.

This is not something that an individual should fly solo in since it is complex and has a lot of moving parts.  Schwab does have a mostly DIY version of a DBP which is $1,500 to start and $1,500 a year, and that's a discount brokerage.  I would reach out to Konstantin Litovsky who specializes in small business retirement plans, especially DBPs, or check WCI's list of vetted professionals.

[The White Coat Investor]

Great article. The 199A deduction giving even more incentive to do this. As the article notes, it's just an IRA masquerading as a pension with some high fees.