Retirement
Managing income tax exposure is an important aspect of building a successful plan.
At VPWM we help individuals and businesses navigate the wide array of alternatives in order to design and implement a plan that meets your needs.
Qualified Plans are those that fall under specific Internal Revenue Service Codes. These include:
- Individual Retirement Accounts – IRA
- Roth IRAs
- Individual 401(k)
- SIMPLE IRAs for small business
- 401(k) and 403(b) plans
- Defined Benefit Pension Plans
Individual plans have contribution limits that vary based on one’s age and Adjusted Gross Income.
Employer sponsored plans have specific requirements regarding the types of investments that must be made available to participants, vesting schedules and non-discrimination testing.
We can guide you towards the best type of plan for you as an individual or for your organization and how to coordinate participation in both types of plans.
Non-Qualified Plans are those that an individual establishes on their own or are negotiated between an employer and employee outside the requirements of a specific IRS approved plan.
An individual will can simply establish any kind of account with which to accumulate funds that they are earmarking for retirement. We work with individuals to evaluate financial instruments (including the tax treatment of gains) that will allow them to meet their goals, minimize risk and enhance the probability of success.
Employer-sponsored plans allow for discrimination (i.e. different benefits for different people) and are extremely flexible. Contributions that the organization might make to financial instruments used to fund future benefits are not eligible for a current tax deduction,
These plans include:
- Deferred Compensation
- Split-Dollar Insurance
- Executive Bonus Plans
Qualified Plans
Qualified retirement plans allow one to defer income taxes on current earnings until withdrawn during retirement, a time when most people will find themselves in a lower income tax bracket. The kinds of investments that one can make in a plan vary by plan type but are quite extensive. Stocks, Bonds, Mutual Funds, Exchange-Traded Funds, Annuities, Life Insurance, Real Estate Investment Trusts, Real Estate investments and even one’s own Business.
IRAs
Invest in Your Future with IRAs
When it comes to saving for retirement, IRAs are a smart choice. With an IRA, you can contribute up to $6,500 per year ($7,500 if you’re age 50 or older), giving you the opportunity to grow your nest egg.
However, keep in mind that contributions may be limited if you or your spouse participate in an employer-sponsored plan and your income exceeds specified levels. It’s essential to understand the rules and regulations.
At the same time, it’s important to be aware of early withdrawal penalties. Distributions taken before age 59.5 are included in your taxable income and subject to a 10% penalty. But don’t worry, there are ways to access your funds penalty-free – if you meet certain conditions, you may start taking income from your IRA at age 55 without penalties.
Are you looking for more flexibility with your retirement savings? Consider a Roth IRA. If you have substantial Tax-Deferred earnings in Qualified Plans, you have the option to transfer funds to an ‘after-tax’ Roth IRA over a period of one or more years. This strategy can be attractive if your income tax bracket won’t change during retirement, allowing your assets to grow tax-free without being subject to annual Required Minimum Distributions.
One more thing to keep in mind: as you approach retirement, it’s essential to know the rules regarding Required Minimum Distributions (RMDs). Starting in the year you turn 73, you must begin receiving RMDs by April 1 of the following year.
Plan for your retirement wisely with IRAs – the key to financial security in your golden years.
Roth IRAs
Contributions to a Roth IRA are not tax-deductible, however, all earnings in the account can be received income tax-free. As a result, Roth IRAs are particularly attractive to those who are currently in a
Contribute up to $6,500 per year ($7,500 if you’re age 50 or older). Contributions may be limited if you (or your spouse) participate in an employer-sponsored plan and your income exceeds specified levels.
Solo 401(k)
Designed specifically for businesses where the owner and the owner’s spouse are the only full-time employees. Business owners can enjoy the benefits of 401(k) plans without the complexity of traditional 401(k) plans.
Maximum contributions of the lesser of 100% of compensation or $66,000 can be made for those under 50 and $73,500 for those age 50 and above. If your spouse also participates, your potential contribution could be $147,000!
Contributions may be made on either a before-tax or after-tax (i.e. Roth) basis.
SIMPLE Plans
Designed for small businesses (100 or fewer employees) looking to start a retirement plan. SIMPLE plans may be structured as either a 401(k) or IRAs. With either option, contribution limits are $15,500 ($19,000 for employees 50 and older).
SIMPLE plans are easy to establish, and do not have the set-up, annual reporting requirements and operating costs associated with other
Plans can offer eligibility to all employees or limit it to employees with a required level of compensation (no more than $5,000) in the current calendar year or for up to two preceding calendar years.
401(k) and 403(b) Plans
401(k) plans are the most common type of retirement plan offered by businesses.
403(b) plans are similar to 401(k) plans but are offered by Education Organizations (public school, college or university), Churches, or Charitable Tax-Exempt 501(c)(3) organizations.
These plans are more flexible than those that are intended for individuals and small firms and typically have more ‘moving parts.’
Employees may defer salary into either tax-deferred or after-tax (Roth) accounts.
To design a plan to meet the sponsoring organization’s objectives a team approach is typically used.
Most organizations will engage the services of a Third-Party Administrator (TPA), Recordkeeper and Investment Advisor.
The Administrator is often the party that designs the plan, provides plan documents approved by the IRS, maintains the plan documents, performs annual compliance and non-discrimination testing and prepares the annual 5500 report for the IRS. The Recordkeeper tracks plan contributions and distributions.
The Investment Advisor selects the menu of investment options for the plan, communicates with employees regarding the features and benefits of participating and assists participants with the creation of an asset allocation plan for their account.
At VPWM, we act as the Investment Advisor. We are often the first contact that an employer has when considering establishing or modifying a plan. As such, we provide input on the selection of plan providers (TPAs & Recordkeepers), investment options and the manner in which investment options are accessed (i.e. through a trust, insurance company group annuity, brokerage accounts, etc.)
In addition to conducting employee meetings, enrolling participants and meeting with individual employees to review account allocation options, we offer employees comprehensive financial planning and ancillary services.
Defined Benefit
Historically, Defined Benefit plans have been offered by large employers and government entities. They are formula driven plans. They provide a benefit based on final average salary (over a period of years, e.g. 3) multiplied by years of service.
Unlike other plan types, the employer guarantees the benefit to be paid and retains the investment risk associated with providing the benefit. They engage the services of an actuary to determine how much they must contribute to the plan each year.
Due to this liability, these plans have largely been replaced by 401(k) plans where the investment risk is transferred to the plan participants. Still, there are circumstances where an employer might have a very small number of employees and desire to maximize the amount of the annual contribution to a plan. In such a case, they can establish a plan that is fully insured and transfer the investment risk to a third-party, typically an insurance company.
Non-Qualified Plans
Non-Qualified Plans typically act as a supplement to Qualified Plans and have come about due to restrictions organizations face on how they compensate employees and the movement away from companies carrying the financial liability for future benefits.
An ideal plan will have the following attributes.
- Selective Participation
- Tax Deferred Growth
- Tax-Advantaged Income
- Tax-Free Death Benefit
- Corporate Tax-Deduction
- No Government Reports
- Easily Modified
Deferred Compensation
This plan is typically used by highly-compensated executives as a supplement to their participation in a Qualified Plan.
Plan design is extremely flexible. In essence, the participant defers current income until some future point-in-time, typically at a time when one would anticipate being in a lower tax-bracket.
The key issue here is that the IRS taxes income when there is constructive receipt. In order to defer tax into the future, the participant must remain an unsecured creditor of the firm. As a result this type of plan is only appropriate where employers are substantial and on a firm financial basis.
Though the employer should set-aside funds to pay the promised benefits there is no legal requirement that they do so. If such a requirement were to be part of the agreement, that would trigger constructive receipt and a current income tax liability.
Instead, employers usually fund the liability on an informal basis with an investment account or insurance policy the selection of which is based on the benefits promised in the plan.
Executive Bonus
Plans of this nature provide key employees with a valuable lifetime benefit. Employers may offer this plan with or without a benefit vesting schedule.
The benefits under the plan can be guaranteed to the employee, because as a bonus plan, the annual cost of the benefit is taxable to the employee.
Some employers sweeten the deal by paying the employee a double bonus, the funds necessary to fund the benefit plan and a bonus adequate to pay the tax on the bonuses.