Professional Benefit Plans: Misconceptions and Common Concerns
“I’ve got 401(k), investments, and other plans in place. Don’t I have my retirement handled quite well?”
If you can live on whatever accumulated values your 401(k) program may provide after market fluctuations, and you do not need larger tax deductions, then OBP plans are not suitable for your needs. If not, then an OBP could make a dramatic difference.
“How do I know that this investment is legal, safe, and secure?”
All qualified benefit plans, whether they benefit business employees or owners, are governed by the ERISA codes monitored by the U.S. Government, Department of Labor, and Internal Revenue Service.
“I’ve read that only small businesses benefit from these plans.”
This is misinformation. Large companies can benefit from OBP’s. Using a complex plan, OBPs can be designed and implemented for businesses of all sizes, including those with over a thousand employees.
“I can do better investing after-tax dollars because I’m still going to pay taxes anyway!”
Let’s use the illustrations below to examine this idea.
Investing After-Tax Dollars
Retirement Income: $120,000
Tax Rate – pre-retirement: 40%
Tax Rate – post-retirement: 40%
Investment Return: 10%
|Year||Age||Cash Contribution||Taxes||Fund Value||Before-Tax Yield||Pre-Tax Return||Post-Return Tax||After-Tax Yield||Retirement Income|
Investing Pre-Tax Dollars
Retirement Income: $120,000
Investment Return (age 53-61): 5.00%
Investment Return (age 62-88): 10.00%
|Year||Age||Cash Contribution||Taxes||Fund Value||Before-Tax Yield||Taxes||After-Tax Yield||Income||Taxes||Retirement Income|
In this illustration, pre-tax investing provides an income for 26 years, compared with a 17-year income with after-tax investing. Clearly, anyone would be financially ahead with pre-tax investing. The advantage lies in the compounding interest on the dollars you are not paying in taxes each year.
“I’ve got my retirement handled. After all, when I sell my practice, I’ll have plenty to retire on!”
This is a common misconception of business owners and professionals. They count on the sale of their business for their retirement income, but over-estimate the value of their business. Often, the perceived value is not realized at the time of sale, and an owner receives much less than 100% of the value of business.
Also, the sale of a business can be affected by many economic factors (interest rates, availability of borrowing funds, etc.), which may be unfavorable at the time that the owner needs to sell. Often, competitors do not want to buy out the owner. They may believe that, since the professional is retiring, that competition will disappear anyway. Frequently, an owner is an integral part in the value of a business. When he retires, this marketable part of business and knowledge goes with them. Another common problem is that the owner may not find a purchaser. If a buyer is found, owners may need to the sell business on an installment basis. There is no guarantee that the business will last to make the required payments.
For the professional, it makes more sense to make the practice work for retirement advantages while it is still a viable, working entity, by taking a portion of what is normally paid in taxes and placing it in a Professional Benefit Plan. This guarantees a retirement income, and when he or she sells the business, he or she may be able to defer a portion of the taxable gain, also.
“A Professional Benefit Plan would cost the practice too much money, because most of the increased benefits will go to the employees.”
Usually, this is not the case. A worse case example would be that, after a preliminary inquiry, a Professional Benefit Plan does not make good economic sense for a particular practice. The plan is not adopted, no costs are incurred, and no harm is done. On the other hand, by not making an inquiry, it’s likely that the cost to a professional owner is larger contributions to the federal government, and less to his or her personal retirement!
“I’ll call my CPA. He’ll know if this is an opportunity for me.”
This is probably the biggest misconception a professional has. CPA’s are often not familiar with Professional Benefit Plans and ERISA requirements.