Defined benefit plan

[Scout]

Sorry if I've missed a thread that would answer my question.
I'm trying (as is everyone else) to shelter more money from taxes. I'm a physician who works as an independent contractor (S-corp with me as my only employee) . I'm 33 yrs old and I max out my SEP at ~$45,000 and save an additional $55,000 in tax friendly mutual funds per year. Clearly this extra 55k is not truly sheltered. I've talked to some advisors who say that a defined benefit plan would work well for me, but from what I've researched I think I may actually be a bit too young for this strategy to work well. I don't think an allowed contribution would be very high (although theoretically the max is 180k per year) for a person my age. To be honest I never feel I am getting unbiased opinions from 'financial specialist' as they obviously have something to gain by setting this up, but I've had a difficult time finding sources to adequately explain this plan. You guys are always very candid and unbiased and I'd appreciate any advice you can offer. Sorry for the length of this post.

 

[samclem]

A "solo 401K" sounds like what you want. We've talked about them a bit on this boeard, so try a search for more info.

Fidelty offers them (that's where mine is), and there are other providers as well. Unfortunately, Vanguard doesn't have them). The cost is very low, you can put away more $$ than a SEP, and the paperwork is very straightforward.

There are also "Roth Solo 401Ks" out there, but I don't have any experience with providers. If you want to pay the tax upfront, that would be the best way.

 

[MooreBonds]

Sorry if I've missed a thread that would answer my question.
I'm trying (as is everyone else) to shelter more money from taxes. I'm a physician who works as an independent contractor (S-corp with me as my only employee) . I'm 33 yrs old and I max out my SEP at ~$45,000 and save an additional $55,000 in tax friendly mutual funds per year. Clearly this extra 55k is not truly sheltered. I've talked to some advisors who say that a defined benefit plan would work well for me, but from what I've researched I think I may actually be a bit too young for this strategy to work well. I don't think an allowed contribution would be very high (although theoretically the max is 180k per year) for a person my age.

Congratulations on your search for the truth, and on maximizing your tax-advantaged savings!

I actually helped a relative start a pension plan in 2006, and is continuing it for the next few years. You are correct that the younger you are, the less the DBP will be advantageous versus a SEP-IRA or solo 401(k).

The $180k figure they quote is actually the limit that your DBP would provide as an annual benefit when you retire - not what you'd be contributing in annual premiums. So, based on a variety of actuarial tables and the balance of your plan assets, your contributions would be less (if younger) or more (if older) than the $180k, depending on how much an annuity would cost to purchase you $180k in annual premiums at age ___ (commonly 65, but depends on the plan specifics).

However, you don't know until you run the numbers. For someone who's 30 and earns the max compensation limit (I think it was $220k in 2006, more or less), the DBP contribution would be roughly $24,600. If you were 36, the contribution would be roughly $37,900. (this is based on a 5% assumed interest rate that your DBP assets grow at, which is pretty close to the lowest you can use...the lower the interest rate, the more contributions you have to put in).

Someone who's 65, however, would be putting in a whopping $272,800/year!


So, obviously, it's really not worth it as much if you're younger. There was a solution in my particular situation to add in a 401(k) voluntary contribution plan, where each person can put in a minimum of 5% of their pay ($10,000 if you earn $200k or more), so that increased the total tax-deferred contributions by $10k, in addition to the pension plan - but that was out of our paychecks.

The downside: we were hit up with a variety of fees! Some were anticipated (like $1,500 initial plan set-up fee, $1,000 annual retainer/calculations fee). However, some were not described in advanced (annual Pension Benefit Guarantee Corp insurance premium of something like $30/person...and then there was a $500 "recalculation fee" when one participant's income rose due to an unexpected bonus, and the consultant had to recalculate all of the contribution amounts for the 401(k).

Long story short - if you're young, it looks like the fees of the DBP would probably offset the benefits of the DBP (even if you deduct the DBP fees as a business expense)...and, your contributions would possibly not even be as much as a totally free (and absurdly simple) SEP IRA (not sure on 2007 limits, but I think maybe $46k for a max salary of like $220k). I don't have any personal experience with a solo 401(k), but several other forum members have experience with it that makes it sound fairly good.

If those financial charlatans want to give you a free consultation, ask them to show you how much you'd be able to sock away give your current age into the DBP-and, more importantly, the TOTAL one-time and annual fees. There are undoubtedly different characteristics between the examples I cited above (an older business owner looking to supercharge the last few years of work) versus a solitary employee who's half the age. But the overall basics are similar.

However, if you're still w*rking in your 50s....
1) my advance apologies
2) it would most likely make sense to seriously consider the DBP then if you need/want to sock away buku $ (and you don't have other people on your payroll that you would have to put contributions in for as well).

To be honest I never feel I am getting unbiased opinions from 'financial specialist' as they obviously have something to gain by setting this up

If that was ever an understatement.

 

[Scout]

Thanks for taking the time to respond with good advice. It sounds like I'll be sticking with my SEP for the next 25 yrs or so.