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High interest saving account?
Old 10-30-2006, 12:19 PM   #1
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High interest saving account?

Hey guys,
I'm new to the game. I'm a 32 year old physician (3 years out of training with a NW of 150K. I have been aggressively paying off my high interest student loans for the past few years as well as starting my long term investments with Vanguard (most index funds). My question is in regards to an emergency fund. Currently I keep about 50K on hand, but I'm not really happy with Vanguards money market accounts for this as they are not very convenient in regards to easy access, checkwriting, ATM's, etc. I've investigated some of the high interest saving accounts online with Eloan, citibank, and a couple of others who offer up to %5.50 (of course variable), but sound very convenient as you can link these accounts with your regular checking/savings so it is easy to access if your in a pinch.
Does anyone have experience with these accounts (or atleast these types of accounts) and would you recommend them as a good place to stick your emergency fund?
Oh yeah,...I want to retire early too!
Thanks,
Scout
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Re: High interest saving account?
Old 10-30-2006, 12:39 PM   #2
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Re: High interest saving account?

Welcome Scout I'm a fellow unseasoned citizen (29 years young) who is also on the path to FIRE.

50k sounds like a VERY safe/generous EF....roughly how many months of expenses is that? There might be a potential for you to shift some of that into more long-term (and higher yielding) investments if you have too much in your stash...

Personally, I keep a no-minimum checking account at my bank, then electronically shift any excess (over $1,000) funds into my Vanguard Tax-Free money market account. Currently, it's yielding 3.46%, and that's tax-free from Federal taxes (don't forget any state/local potential tax implications). If your highest bracket is 28%, it's equivalent to 4.81% pre-tax yield. If you're in the 33% bracket, it's 5.16%. If the 35% bracket, it's 5.32%. You can easily transfer in/out of the Vanguard account.

Either the Vanguard, or any savings/money market account (which is either federally insured, or invests in federal debt instruments) would be a great choice. As far as automatic debit/linking, I'm more hands-on, and prefer to do the transfering myself as a secondary measure (just in case someone gets their hands on my checkbook or debit card or other banking information).

Since I buy everything on a credit card (and get from 1%-2% cash back) and use automatic bill pay, I hardly ever write any checks, so it's not a big deal for me to deposit my pay check into my checking account, see what bills are to be paid in the next 20 days, and transfer the excess to Vanguard. But, your mileage will vary.

Also, just out of curiosity, what is your average rate on your student debt?
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Re: High interest saving account?
Old 10-30-2006, 12:47 PM   #3
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Re: High interest saving account?

My Vanguard Admiral Treasury MM account has checkwriting privileges for free. They sent me a checkbook (after I requested it). Not sure if I have a max # of checks per month that I can write. Yields 4.94%, mostly free of state income tax, so effective yield is ~5.31% for me at a 7% marginal state tax rate.

With this, I can also buy vanguard mutual funds instantly since funds are immediately available, instead of waiting a day or two for the funds to get there. Helps if you want to "buy the dip" after a particularly bad day (rather, at 3:59 pm on a particularly bad day).
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Thanks MooreBonds
Old 10-30-2006, 12:55 PM   #4
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Thanks MooreBonds

You're right...50K is probably too much. I use about 4000K each month so I could probably get away with 25K. In regards to you tax-free money market account, how is it tax-free? I maximize my SEP-IRA yearly through my other higher yield accounts so can I still stick money in a tax-free money market? I'm in the 35% bracket so I would benefit greatly from the tax-free account if I can still do it!
As far as my remaining student loans, their rate is about 3.5% so I'm paying them off as slowly as possible. The others I have already paid were running around 9%.
I tried doing the everything on a credit card thing, but I'm a procrastinator by nature and started turning in some payments late.
When you say you transfer everything between your accounts hands-on what do you mean. Are you able to go online and simply make transfers, do you call a Vanguard rep, or do you have to send in those paper vouchers Vanguard sends you?
Thanks for your response!
Scout
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Re: High interest saving account?
Old 10-30-2006, 01:00 PM   #5
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Re: High interest saving account?

I transfer money from VG to local bank all online. Takes maybe 2 minutes and you get your money in a day or two usually.
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Old 10-30-2006, 01:07 PM   #6
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Do you have to have admiral shares to transfer money online? I know that after you break that admiral threshold you get more privileges (hope to be there soon).
With your admiral treasury MM do you also get ATM access. Ideally, since this is an emergency fund I'm talking about I shouldn't need these options often, but they're good to have if you need them.
Thanks for your responses.
Scout
How exactly did you link your bank account with you Vanguard account. It's not very obvious on their website or should I just call one of the reps.
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Re: Thanks MooreBonds
Old 10-30-2006, 01:27 PM   #7
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Re: Thanks MooreBonds

Quote:
Originally Posted by Scout
You're right...50K is probably too much. I use about 4000K each month so I could probably get away with 25K.
Perhaps consider putting 25K into Wellesley? Still readily available (within a few days) if you need it, and (long term) has a pretty good track record of both growth and income, and your odds of losing money when you sell it at any given moment are pretty darn slim.

Quote:
Originally Posted by Scout
In regards to you tax-free money market account, how is it tax-free? I maximize my SEP-IRA yearly through my other higher yield accounts so can I still stick money in a tax-free money market? I'm in the 35% bracket so I would benefit greatly from the tax-free account if I can still do it!
The Municipal (tax free) money market account invests in municipal debt, just like a Federal money market account invests in US Gov't debt. Any income from municipal bonds/debt is free of federal income taxes. Technically, if you get municipal income from another state, and your home state has a state income tax, you're "supposed" to report it....

It's not the same as an IRA - the muni money market account is just like a savings account, except it has different tax characteristics. Since it is free from taxes, it doesn't yield as much...but, depending on one's tax situation, it can be better/just as good as a savings account at a bank (which would be taxable for federal/state/local taxes).

It's good to hear that you put away the 9% student debt, and are taking your time paying off the 3.5% remaining debt. Very financially astute!

Is there a way to work on your procrastination? Paying those late fees/interest rates on credit cards is a killer! Have you tried to simply sit down at the computer the day the bills come in, and enter them in your on-line checking account bill pay? That way you don't have to worry about remembering to pay them at the last minute. OR, better yet, many credit card companies will even AUTOMATICALLY DEBIT YOUR CHECKING ACCOUNT for the amount of your bill!!! All you have to do is remember to check your statement (or, better yet, check your recently charged items on-line) to watch out for fraud/unauthorized charges.

Like justin said - you can transfer everything on-line at Vanguard, 24 hours a day, 365 days a year. It takes about 1-2 minutes. You don't need to be an Admiral or Flagship client.

To set up electronic transfer:
1) Log in to your Vanguard account
2) on the Red menu tabs at the top, click on "My Portfolio", then "Account Options"
3) Under "Periodic Transfers", "Electric Bank Transfers", click on "setup" (you will also see another link for writing checks of $250 or more from your Vanguard accounts)
4) fill in the info requested on the screen.


In all honesty - it took me a few days/tries on Vanguard to get the hang of the process of transfering the money (it seemed less intuitive to me compared to other brokerage websites). However, once you get the hang of it, it's a piece of cake.

On a side note (since some people are not aware of this and I almost passed the opportunity up)...even if you max out your SEP IRA, you can still contribute to either a ROTH or a Traditional IRA. You mentioned you are in the 35% bracket, so you can't do a ROTH, and you can't deduct contributions to a Traditional IRA...HOWEVER, you can still make NON-DEDUCTIBLE contributions to a traditional IRA ($4,000/year for your age), and the earnings will grow tax deferred. When you withdraw the money, you aren't taxed on the value of the contributions. I'll be doing that this/next year to maximize all of my available tax-deferred options.

On another note - are you familiar with the Health Savings Account? You can deduct your contributions from your AGI, and (AFAIK, but someone correct me if I'm wrong) you get the deduction regardless of your income...and it would be worth even more for you, given your tax situation (save $.35 federal tax dollars for every $1 in deductions, plus any state/local effects).
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Old 10-30-2006, 01:44 PM   #8
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Thanks for taking the time to such an in-depth/quality answer! You guys have helped alot. It sounds like the other high yield saving accounts aren't worth it when I can go with the available options at Vanguard.
This is the best forum I've been a part of.
Thanks
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Re: Justin
Old 10-30-2006, 01:45 PM   #9
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Re: Justin

Quote:
Originally Posted by Scout
Do you have to have admiral shares to transfer money online? I know that after you break that admiral threshold you get more privileges (hope to be there soon).
With your admiral treasury MM do you also get ATM access. Ideally, since this is an emergency fund I'm talking about I shouldn't need these options often, but they're good to have if you need them.
Thanks for your responses.
Scout
How exactly did you link your bank account with you Vanguard account. It's not very obvious on their website or should I just call one of the reps.
The admiral class of mutual funds and money market accounts become available if you put $100k into them (for the mutual funds) and $50k minimum initial investment in the Admiral Money Market. You can transfer money for free with any of the money market accounts or investment accounts.

You need $250,000 at VG to be a "Voyager" member (I'm not!). Over $1 million gets you "Flagship" member status. They have the "vanguardadvantage" account that has more banking options (billpay, atm etc.? - not sure). Vanguardadvantage is $30 a year I think for voyager members and free for flagship members.

Call the Vanguard reps - they seem pretty knowledgeable about the basic account features and can point you to the right forms.

The electronic transfer option is a little confusing the first time or two. I believe you have to "sell" your money market shares and designate the "sale proceeds" to be deposited into your linked bank account.

Buying new mutual fund shares from your VG money market account is similarly complicated. Instead of "buying" new shares of a mutual fund and paying for them with funds from the MM account, you have to "exchange" from your MM into the new mutual fund shares. to understand this, just understand that VG treats the money market accounts as if they were mutual funds and you own a certain number of shares valued at $1 each in the MM mutual funds (this is because they really are mutual funds).

I like the simplicity of having my money in one less place (instead of having a citibank or ING or emigrant direct account in addition to my Vg account and my local bank account) and still receive a high yield.
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Re: Thanks MooreBonds
Old 10-30-2006, 01:47 PM   #10
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Re: Thanks MooreBonds

Quote:
Originally Posted by Scout
I maximize my SEP-IRA yearly through my other higher yield accounts so can I still stick money in a tax-free money market? I'm in the 35% bracket so I would benefit greatly from the tax-free account if I can still do it!
Solo 401(k). You can put more into it than a SEP or SIMPLE.
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Old 10-30-2006, 01:50 PM   #11
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Re: MooreBonds

Quote:
Originally Posted by Scout
It sounds like the other high yield saving accounts aren't worth it when I can go with the available options at Vanguard.
That's my same conclusion. You may be able to chase yields at other places and occasionally get 25 basis points more interest (0.25%). But it hardly seems worth the inconvenience and hassle of transferring accounts and setting up new accounts for a small benefit.
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Re: Thanks MooreBonds
Old 10-30-2006, 02:17 PM   #12
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Re: Thanks MooreBonds

Quote:
Originally Posted by eridanus
Solo 401(k). You can put more into it than a SEP or SIMPLE.
Given that he's in the 35% bracket, I presume that he's maxing out at 42k/year (in 2005) with the SEP, so he wouldn't be able to put more into the solo 401(k), would he?

Actually, while we're on the subject...are you self-employed Scout? Work for a health care provider? Partner w/ other docs (or have your own partnership)? Depending on your answer, you might be able to setup a Defined Benefit Plan (traditional pension plan) that would allow you to sock away so much money the SEP would seem like spare pocket change..but, it has its potential drawbacks.
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Re: Thanks MooreBonds
Old 10-30-2006, 02:24 PM   #13
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Re: Thanks MooreBonds

Quote:
Originally Posted by MooreBonds
Given that he's in the 35% bracket, I presume that he's maxing out at 42k/year (in 2005) with the SEP, so he wouldn't be able to put more into the solo 401(k), would he?
Oh, good point. The maximum is the maximum.
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Re: High interest saving account?
Old 10-30-2006, 03:00 PM   #14
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Re: High interest saving account?

I've not heard of the defined benefit plan! Sorry guys I've spent the last 14 years focusing only on medicine so forgive my naivety.
I am an independent contractor. I'm an emergency medicine doc working for a large staffing organization. I get paid a salary only so I have set up my own tax payments, health insurance, disability, etc. The trick is figuring out what all you can write off.
I do max out my SEP at 42,000 and (now that I have my other loans paid off) save an additional 56,000 through my personal accounts yearly. Of course, the additional 56,000 comes after taxes unfortunately!
My wife is also a physician in the same exact situation. We keep our accounts seperate.
Scout
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Re: High interest saving account?
Old 10-30-2006, 06:54 PM   #15
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Re: High interest saving account?

Quote:
Originally Posted by Scout
My question is in regards to an emergency fund. Currently I keep about 50K on hand, but I'm not really happy with Vanguards money market accounts for this as they are not very convenient in regards to easy access, checkwriting, ATM's, etc.
Welcome to the board, Scout.

A couple things about emergency funds-- first, you probably have overwhelming cash flow to handle car repairs or property damage. You could put those charges on a credit card or a home equity line of credit and pay it off in the next month. That's probably plenty of time for Vanguard to transfer their money from whatever account you keep your cash stashed in to wherever you need to pay the bill.

Second, if you're jobless then you have no cashflow, but your spending will probably drop too. You mentioned $4K/month expenses but if you were facing long-term unemployment (admittedly that's pretty unlikely in your case) then you probably would cut back in a few areas. If your bare-bones spending is only $2K-3K/month then you only need about $12K-$18K in your "emergency" account. And since your spouse is working too, you might even be able to cover all the bills on her salary and only keep $5K-$10K in cash. And again you'd have plenty of time to raise cash & pay bills, even with Vanguard.
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Re: High interest saving account?
Old 10-30-2006, 07:04 PM   #16
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Re: High interest saving account?

Welcome Scout,

I'm a Dentist and very solidly in the 33% bracket. We keep our emergency cash in a tax free money market. Tax free money market accounts are available from any mutual fund family or brokerage. It took me a while but eventually I learned that it is the AFTER tax return that is most important. I mention this because you will very often find that in taxable accounts you will want to consider municipal bonds or muni bond funds (also tax-free) instead of treasuries or other taxable bonds. Good luck
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Re: High interest saving account?
Old 10-30-2006, 11:56 PM   #17
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Re: High interest saving account?

Quote:
Originally Posted by Scout
I've not heard of the defined benefit plan! Sorry guys I've spent the last 14 years focusing only on medicine so forgive my naivety.
No problem Scout! Everyone on this forum came here knowing something no one else knew, and sharing that knowledge...whether that made this forum a better place, or it just means it's a ceaseless pit of idle chatter and useless knowledge floating around like atoms swirling around a forming star remains to be seen.

Quote:
Originally Posted by Scout
I am an independent contractor. I'm an emergency medicine doc working for a large staffing organization. I get paid a salary only so I have set up my own tax payments, health insurance, disability, etc. The trick is figuring out what all you can write off.
I do max out my SEP at 42,000 and (now that I have my other loans paid off) save an additional 56,000 through my personal accounts yearly. Of course, the additional 56,000 comes after taxes unfortunately!
My wife is also a physician in the same exact situation. We keep our accounts seperate.
1st question - do you have a CPA doing your taxes, or do you do them yourself? If you do them yourself, how much time have you spent researching your various ins and outs of being an independent contractor? If you have a CPA, how did you wind up chosing them over the other hundreds in the phone book?

It sounds good that you're an independent contractor - lots of options here.

For starters, the Defined Benefit Plan is for companies (or independent contractors) that want to start a good old fashioned pension plan for themselves. Why would someone want to do that, when throngs of companies are abandoning them?

They abandon them because they can require great sums of money. However, remember that this money is deducted from your income.

Right now, in 2006, the limit you can stash away in you and your wife's SEP IRA is 44,000 each. However, with a DBP, YOU (and your wife) determine what "annual pension" you want to give to yourself and her. It can be any formula you want - it can be simply:
1) Equal to your last year's salary before you retire
2) Some complex, convoluted equation of (for example) # years of service x 2% x average of 3 highest years of salary equals your annual pension at age 65
3) anything in between of 1) and 2).

one of the few limits is that your annual pension CANNOT be greater than some large number (it increases from time to time. The 2007 limit is a whopping $180,000 as noted in this IRS bulletin: http://www.irs.gov/newsroom/article/...163616,00.html )

That means when you and your wife retire whenever, your plan cannot estimate your annual benefit payout to be more than $180,000 for you and $180,000 for your wife.

So why is this a great thing?

The easiest way to analyze pensions and conceptulaize it is to think of it in terms of an annuity (since that what many pensions wind up being). Think of it as your pension plan buying you an annuity when you turn 65 (OR, whatever age you so desire when you set up your DBP). That means, your DBP has to have enough money to purchase an annuity at your magical retirement age for whatever your annual pension will be.

For instance....a man who is 55 years old and wants to "buy" a pension (annuity) that pays out the limit ($180,000 a year) for the rest of his life would have to fork out roughly $2.5 million (source: immediateannuity.com). Granted, if you shop around, you'd get better rates, but this is just a back-of-the-envelope calculation.

So that means the defined benefit plan would need to have $2.5 million in cash when you turn 55 to buy that annuity to pay you $180,000/year for the rest of your life. (you determine the age at which you can start collecting your pension). Working backwards, an actuary would tell you what your pension plan will need to have in annual contributions to reach that $2.5 million stash if you start today and end at your arbitrary retirement age.

Negative notes on the above:
1) I mentioned an actuary. You do need a certified actuary to do the calcs and fill out the IRS form. Not a huge deal, but it will cost perhaps $5,000-$8,000 the first year to set up the plan and fill out the forms, then perhaps cost $5,000/year (perhaps less) to pay the actuary to fill out the annual IRS forms and check the balances and do some more annual calculations. (note: the costs to pay the actuary are TAX DEDUCTIBLE)
2) You will decide how the defined benefit plan assets are managed. You can plunk them into a mutual fund of your selection, or you could pick individual stocks/bonds/etc. POTENTIAL DANGER: If you choose poorly, and your DBP assets drop from what they need to be to reach your retirement age, YOU WILL HAVE TO CONTRIBUTE MORE to bring the balances up to where they need to be, in addition to your annual contributions.
3) If you ever hire anyone else (don't really know if that would be possible, given your independent contractor status), you would have to offer them the same pension calculation you do for yourself. Given that, I would recommend that you focus your pension calculation on annual salary (since it would be unlikely that they would make nearly as much as you).

BENEFITS of the DBP:
1) It's not forever - you are free to stop the plan at any time (although, if you stop it after just 20 days, you will likely arise some suspicion from the IRS). If you decide to cancel your Pension Plan, you simply roll the pension plan assets into an IRA, and treat it like a normal IRA (with RMDs, SEPPs, etc.).
2) Depending on your location, IRA's/retirement accounts sometimes offer better asset protection. So, more of your assets would be locked into your IRA and potentially not have as much lawsuit exposure
3) You can sock away BUKU bucks to meet the funding requirements of your equation - far more than the $44,000 (current) annual SEP contributions. For instance, take the following assumptions:
-You earn 5% of your highest income per year of service, with the max being the $180,000 annual pension allowed by current law
-YOU can set the assumed investment gains in your DBP with a certain range (such as 5% or thereabouts)
-Work 10 years and you have earned 50% of your highest income as an annual payout (5% per year of service). Assuming this would put you at 43 years old, that means that your pension plan, when you turn 43, needs to have enough in investments to continue to grow at 5%/year to buy that annuity paying out $180,000/year when you turn 55. For simple illustration purposes, to have 10 years of contributions (age 33-43) and also having enough at age 43 to be able to buy a $2.5 M annuity at age 55, you'd need to contribute (approximately) $100,000 per year, assuming a 5% annual return. At that rate, you'd be able to sock away roughly $100,000/year to your defined benefit plan and deduct that against your taxes - over twice what the SEP would allow you to put away/deduct.

NOTE: The above are only very rudimentary, rough estimates and calculations. Someone who has defined benefit plan experience will be able to give you more realistic/accurate guesses.

On another note - what kind of health insurance plan do you have? I smell the possibility of an HSA brewing here
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Old 10-31-2006, 12:28 AM   #18
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Thanks for this reply as well as the reply in the 'Dreamers' forum. It's 2am and I'm about to hit the sack. I want to spend some time reading your post as it seems to have some very valuable information. I'll have to drill my accountant about this...recommended by my Department Chairman (who has since changed accountants). You would think my accountant would atleast mention this to me.
So how do you know so much about this anyway? I understand from your other post that you spend time in the construction business, but your knowledge-base seems more deeply rooted. Are you self taught or are you also employed in the financial business?
Either way I'm glad we have people on the forum as willing to share information as you are. I will read your last Posts in more depth in a day or two.
Thanks
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Re: High interest saving account?
Old 10-31-2006, 06:25 AM   #19
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Re: High interest saving account?

Very comprehensive post MooreBonds re: DB or solo DB as they are sometimes referred to. I initially explored the solo DB several years ago and even got a quote or two. Initial quotes were very high I thought, $15k-$20k. I also investigated the annual plan cost as this is of course, "part of the deal." I thought that Fidelity might provide this service but they do not.

After shopping around, I found a reputable firm that did the initial set-up and annual reporting. The set-up was about $3,000 as I recall and the annual reporting now is about $2,000. I have participated in about every type of retirement savings plan and the soloDB is by far the most powerful. It is designed for a specific type of individual/situation and not for a broad group. As such, it is not a program that is widely known.

I had a similar experience, as Scout mentioned, when I asked friends and associates who were in financial fields about solo DB's. My CPA was aware of them (but never mentioned them to me) but did not know of a firm that set them up or administered them. For the annual reporting, Fidelity refers clients to two "third party administrator" firms, one is called PSMI I think.

Enjoy this Forum and continue to be impressed with the quality and breadth of the information.
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Old 10-31-2006, 07:04 AM   #20
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Re: High interest saving account?

Moorebonds, an excellent job of describing defined benefit plans for the self employed. As Moorebonds mentioned, be aware of the risk of underfunding and the fact that contributions are mandatory, not discretionary, unlike profit sharing plans. We had such a plan at my office for a while to enable some older lawyers to be able to catch up on saving for retirement. We have since dropped the plan (and went to a profit sharing plan) as we did not want the risk.
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