For most successful people we tend view the CPA as the guru who knows all there is about tax matters, saves you from costly mistakes and paying unnecessary taxes. When in fact the CPA as it relates to supplemental benefit plans for the professional or business owner may be the least equipped to advise you. For more information go to: Your CPA may be costing you millions.

I’m not questioning their overall tax knowledge, but benefit plans for the professional or business owner requires an entirely different set of skills and knowledge far outside the common type of plans they’ve seen time and again; the 401(k) or profit sharing arrangements.

It’s because of their unfamiliarity with professional or owner benefit plans, their lack of understanding and familiarity with decades of code sections, technical memorandums and how to interpret the intent of the Internal Revenue Service that they fail to understand these types of benefits, their availability and potential relevance to their clients. They also fail their clients by summarily dismissing legitimate opportunities they are unfamiliar with costing their clients millions in overpayments of taxes and lost wealth accumulation.

What they don’t know can hurt you, or can it? Let me illustrate an example:

For illustration purposes, assume a gross income of $150,000 taxed at a combined rate of 40% produces a net income of $90,000. In some states, the rate is higher.

That’s a real loss of earned income of $60,000. This is your mandatory tax obligation, or is it?

Furthermore, how many hours of work do the $60,000 represent, a week, a month, two months?

Professionals are always trying to manage the bottom line which frequently is about savings small percentages. Yet one of the larger non-productive expenditures, our federal tax obligations, is often larger than the percentages you retain. Federal expenditures are one of the

most wasteful expenditures of capital, which directly affects productivity.

So here’s what’s been missed!

As of 2000, many professionals regardless of the underlying business entity or corporate structure may now be entitled to considerable new deductions of as little as $70,000 up to $350,000 annually per participant.

In the process when there are employees, they are left in the 401(k) or profit sharing plan while the professionals or owners are carved out into a stand-alone plans where the afore-mentioned tax dollars are automatically saved and directed into the plan generating notable new tax savings with unprecedented accelerated accumulations using tax dollars you were previously mailing off to the IRS.

Remember the earlier question: how many weeks or months were lost just to pay your tax obligation?

By eliminating that obligation, what’s your bottom line now?

What happened to your productivity?

People scramble to gain just a single additional point or two in their portfolios.

Your return is 40% with minor effort on your part.

That’s real money you’ll keep and benefit from. The question isn’t what do you have to loose, but how much do you want to gain?

Successful people understand the difference between working harder versus working smarter. By utilizing these and other strategic financial strategies, sustainable wealth is either created or accelerated. The choice is yours. After all, “It’s Your Money”.

As with most doctors, you probably have a retirement plan which is an employee-oriented type plan – typically a 401(k) and or profit sharing plan. Providing you are willing to contribute enough money on employer contributions for your employees, you will receive an increased contribution yourself. There’s severe limitations and little tax savings for you after you consider the added employee contributions. Your increased tax savings paid for your increased employees contributions. The net result – no gain.

Surprisingly, professionals such as doctors and dentists who are capable of making a great deal of money often are no better off than those they employ. One would tend to assume otherwise given their perceived business success. I personally have known a family who by all accounts appeared to be a wealthy family, where the non-working wife spent $1,500 a month on manicures, nails, pedicures, makeup stuff etc, plus the additional expenses for workout clubs, lunches, cars, clothes and the list goes on. This professional told me they just couldn’t possible redirect $200,000 a year because he would have to force his wife to adjust her spending and lifestyle habits. It wasn’t possible. This man by all accounts and appearances looks and acts like a financial success but he will be no better off than the average American who will struggle throughout retirement.

A Little Bit of Recent History, There Are Now Massive Tax Deductions Available to You – That Every Professional Should be Taking Advantage of

The attitude of Congress had been that employees needed to be helped; while owners or professionals were left with little real tax relief. The regulatory rules and regulations were intentionally set to discriminate against highly paid or successful individuals as it has been for more than thirty years. Congressional changes in 2000 opened up again an amazing opportunity for your profession. Suddenly, Congress realized the relationship between meeting the professionals and the employees’ retirement needs. Both need to be addressed and are interrelated.

Defined benefit plans while being new to most people today have their origins back to the 1960s when these types of deductions were first permissible. Older doctors will confirm that large deferral opportunities were available and they participated religiously. They deferred and accumulated money very quickly. But in the mid-seventies, Congress suspended the much-coveted deductions doctors enjoyed, and imposed newer more stringent plans commonly known today as 401(k) or profit sharing plans. These plans immediately imposed severe discriminatory limits against all high-income earners. That is until 2000 when Congress rolled back or amended certain restrictive provisions which today permit the creation of financial opportunities with the intent to once again favor the professional without taking away (and in many cases without increasing the cost of existing employee) benefits.

How much can a doctor deduct? 

The objective is to design a strategy where you are able to personally receive new deductions ranging anywhere from an additional $50,000 up to and including $350,000 generating a corresponding income tax savings being deposited directly into your plan.

Will my Employee Cost Increase?

The objective is to maintain existing employee costs at current levels, while permitting the doctor additional benefits and tax savings in a separate stand-alone environment.

What’s Involved?

Initial consultations are treated much the same way you treat your patients. First, there is an initial consultation to accurately determine your overall objectives and what you want to accomplish. Gathering specific information from you is similar to how you first acquaint yourself with a prospective patient. The solutions derived from well thought out strategies become plans and programs designed to your individualized situation, tailored to your specific needs both personally and for the benefit of the clinic when necessary.

The Importance of Substantial Wealth Accumulations

It is often daunting to realize the total dollar accumulation needed to maintain a certain lifestyle. To create $100,000 in annual income at the onset of retirement, you will need $3,742,364 and for a $200,000 income, you will need to have saved $7,484.728 for a 30 year retirement at 3 percent inflation. (See the article: You need more cash to retire!)

Statistically most Americans retire with considerably less than $350,000 in assets. Many will actually have to rely on the equity in their homes (if there is any due to the decline in real estate values) to offset their lack of savings. To enable a person to live modestly and I do mean modestly on $40,000 a year times twenty years, you’ll need at the onset of retirement in excess of ONE MILLION DOLLARS. Because of inflation and rising prices for products and services, this sum will only provide conservatively a stagnant $40,000 income because investment returns have generally been less than the real inflation rate. The other consideration to be factored into the $1 million retirement capital requirement is that this is for twenty years ONLY. What happens if you live longer? What happens if government entitlement programs are scaled back which is the current likelihood based on reports out of Washington?

Given the likelihood that at some point during those golden years you’ll experience an unforeseen major medical issue, you can throw in the towel because you’ll be financially ruined (and that’s assuming you still have and can afford state of the art medical coverage throughout retirement). Considering the frequency medical insurance companies seem to disallow or terminate benefits at the moment they’re most needed, you have no hope short of having your face plastered on milk cartons asking for donations.

By the year 2026, the expected expenditure for social programs by the U.S. government as a percentage of total governmental expenditures will be at least 65 % of the total United States budget. By 2046, the cost is expected to be 75 % of total governmental revenue up from 30% today. What all of this means is that for individuals with the means to accumulate substantial wealth, these individuals are once again encouraged through the application of granting large income tax deductions to start accumulating large sums of money which will partly help to secure their personal financial future.

Are you selling your practice for a profit?

The other single most expensive loss to doctors’ wealth occurs when selling your practice. Most doctors either close the doors or pass the practice on to other younger doctors. There are other options available to doctors outlined in Buying or Selling a Business and in more detail in my book “It’s Your Money”. Doctors routinely fail to consider the value of their practice and how to structure the eventual sale of their practice so that their years of effort and capital investment can yield a meaningful return on investment.

Adequately anticipating the true cost of medical coverage

Requiring medical care and having sizeable disposable assets to pay for it can be the single largest expense you will undeniably face at one time or another in your retirement years.

Whether you are self-employed or working for a clinic, you are to some extent insulated from issues facing millions of retirees each year; that being the long term cost of medical coverage. Even modest coverage can be frightfully expensive over an extended period. Compounding this issue is your age and the incremental increase in coverage and likelihood of having a pre-existing condition which precludes you from coverage.

Currently medical coverage or expenses are absorbed as a business expense. Typically, these costs are reflected as expenses and are calculated back into your practice simply as another cost of doing business. However, once you retire these costs are painfully reborn without the benefit of your clinic and paying for them with only after-tax dollars eats at the capital set aside for retirement. For every dollar spent assuming you’re in a 30% tax bracket, you will have to have earned $1.45 as pre-tax income before $1.00 is available.

We, realistically, do not have the luxuries our parents had in expecting fully funded and relatively low cost coverage. There was a book out a number of years ago titled “Who Moved My Cheese”?. The emphasis was that people need to be flexible and adapt as work situations change. The cheese has not only been moved but we’ve already eaten most of it. Being able to afford medical coverage beyond government plans to receive the care you want can significantly erode financial resources. Failing to change with the times and plan accordingly by not understanding the future costs which for many of us aren’t that far away, could leave us destitute. With insufficient capital none of us can go back and relive the last decade and acquire the necessary capital.

Social Security and Medicare are drastically changing what they will pay or cover. Remember, they only pay for about ½ of the coverage you’ll need anyway. A larger than anticipated portion of your pre-tax income will have to be permanently allocated and taken out of circulation for life’s other pleasures for the remainder of your life.

Monthly premiums and co-payments are tied to your income; with incomes less than $80,000 there is one premium, over $80,000 annual for a single person there’s a higher premium, and for married couples its $160,000. That’s right! Your benefit and outlays are income sensitive unlike in previous years. The higher your income, the less you’re entitled to unless you agree to a larger monthly payment and or a higher yearly out-of-pocket expense. What I believe people will find shocking is the total cost individuals will pay for government issued medical coverage assuming retirement age is 65 and death occurs either at age 90 or 95. Individual premiums and co-payments for this 25 -30 year period are expected to cost individuals between $300,500 and $558,000 depending on health care inflation per person until death at age 90. By extending coverage to age 95, the cost skyrockets to between $615,000 and $907,000 per person.

Now, take this off the top of your retirement income each month. How will this directly affect your long-term spending habits? I suspect it will put a crimp into some of your plans regarding your security and retirement.

• The medical coverage premium from above was just for the basic costs of government issued health care coverage.

• How many of us want to be saddled with this and only this type of coverage? Consider what this basic coverage doesn’t or can’t cover in the future.

• A onetime major medical treatment can cost $40,000 or more assuming there are no on-going rehabilitation, other medical services or medication required.

• Medical prescriptions, co-payments, rehabilitation due to disease or injury, and major medical conditions like heart attack, limb, hip or joint replacement, and prescriptions costs have not even been factored in.

• Ask yourself this; how many of us know of an older individual who has cruised through retirement without a scrape?

• How many retirees have had or are experiencing medical ailments or lingering physical limitations? This doesn’t even touch long term care facilities which frankly few of us at that point will have any say about, certainly not without considerable assets.

Options available to doctors to pre-fund retirement medical costs

Professionals, are accustomed to being their own care-givers during their working years and a surprisingly large percentage of professionals, fail to anticipate the cost of adequate private medical coverage post retirement and are financially unprepared for these medical premiums which is the main option once they are retired.

Doctors need to be aware of and take advantage of pre-funding benefits on a tax-deductible basis that can improve current profitability and decrease the rate of capital depletion during retirement that are available.

Accelerate wealth accumulation during most productive years

The point is if you can discover how you can accelerate your wealth accumulation during your most productive years by adopting tax sensitive strategies; what’s the worst that can happen? I’ve never had a client complain because they’ve had too much money; but I see many wishing they would have been more prudent and interested in how to better maximize all available opportunities while they were working – opportunities that are available if we truly want to succeed at creating sustainable wealth – after all, “It’s Your Money”.

There are 4 specific areas that should not be overlooked in the financial planning process that are often ignored.

•  The length of retirement and the resulting massive amount of capital required, (this is grossly underreported in the media)
• Systematically increasing your wealth by ensuring your money works at least as hard as you do  - this requires taking advantage of misunderstood or frequently pre-maturely dismissed tax opportunities which you are legally entitled to,
• Knowing the true cost of medical coverage, and how to establish pre-funded accounts utilizing pre-tax dollars instead of after-tax dollars throughout retirement (this alone will save you $300,000 to $400,000),
• Discovering how to leverage the sale of your practice to secure the greatest return for you and the purchaser – this involves adopting strategies that will save the buyer a few hundred thousand dollars making your practice unbelievably financially attractive because years of debt repayment for the purchaser have been eliminated.

As record numbers of baby boomer dentists approach retirement this decade, many will discover too late that their retirement years and the comfort and security they’ve come to anticipate may be more of a dream than reality!

The culprit is two-fold; longevity and recent systemic economic decline. Financing any retirement period over a protracted period of time – twenty to thirty years – cumulatively necessitates massive capital accumulated in the millions of dollars prior to retirement.

Forestalling the adoption of legal accumulation strategies means you are part of the epidemic of Americans who fail to plan and save for their retirement. You choose to believe that next year you’ll start looking into how you could accumulate more and will start saving more next year. Many studies confirm this belief (expecting to save in the future) and the results show that people’s intentions are not consistent with their actions and they fail to save. This postponement is of epidemic proportions in the US and is by far the single greatest risk to the creation of sustainable wealth or wealth for life. Failing to take action will have one consequence unless you win the lottery or inherit substantial wealth, you have given up and have accepted the idea of living a sub-standard life the last twenty to thirty years of your life.

If your objective is a sustainable $100,000 per year of fully taxable income (remember your tax rate took a jump due to the lack of deductions, so consider you’ll be paying 30%) indexed over twenty years at 3% annually, the amount needed in liquid assets at the onset of retirement is $3,742,364. For $200,000 a year fully taxable income the need is $7,484,728. Unless you expect to completely deplete your estate, your net worth would have to be well in excess of $10 to $12 million with at least one-half in fairly liquid assets.

The hidden risks in real estate

I realize many dentists have extensive real estate portfolios; however, due to the nature of unexpected financial needs (like immediate medical expenditures, for example), real estate while possessing many recognizable benefits also has several drawbacks.

It can be hard to dispose of quickly without major discounting. It takes time to free up significant cash without selling a property. If accessing a line of credit or increasing the encumbrances on the property is how cash is accessed, this in turn creates an increased financial long-term drain to service the new debt load.

The most obvious drawback is that real estate can unexpectedly drop in value for many years (or decades in some regions) during market cycles. Liquidation is possible but in so doing your tax obligations increase significantly when it’s sold using up more valuable capital.

Typically, it is safer not to view this real estate as an immediate source of funds when large unexpected events occur and cash is needed.

The goal should be to have significant cash or other liquid investments available.

How to supercharge your wealth

You are entitled to more than what you’re currently benefiting from. You’re entitled to take advantage of legal strategies which will assure you a higher hourly income than what your hands may produce.

While successful individuals, professionals, and business owners fight their ongoing battle of cost containment to maintain tight margins or profits, they unknowingly are not availing themselves of the single greatest expense, their tax liability!

Unbeknownst to them, Uncle Sam has as far back as 2000 made available through the adoption of owner or professional benefit plans exceptionally large tax deductions ranging from $80,000 to $350,000 annually which immediately decreases tax liabilities often to less than 1/2 of what you are currently paying. This is a meaningful tax opportunity and strategies like this are available that your accountant has little familiarity with.

Instead of accepting the prevailing assumption that there is little one can do to accumulate substantial sums of money without working harder or trimming margins, in reality, there are solutions to substantially increase your assets to achieve sustainable wealth.

Enhancing Productivity to Increase Your Personal Wealth

What’s the real cost of being less productive and not taking advantage of opportunities you’re entitled to?

To benefit from higher productivity scenarios, an understanding of productivity profitability can increase your net income by 22%-40%, and materially augment your net worth in a few years. This single realignment by itself without changing how you practice can enhance your wealth accumulation.

Example:

A practitioner has annual billing of $3 million with pre-tax income margins of 10% and a combined tax rate of 40%. He will retain income of $180,000 annually or a net hourly income of $86.54 based on working 2,080 hours a year.

With productivity profitability modeling, using the same annual billing of $3 million annual billing with a pre-tax income margin of 10% and a combined tax rate of 20%, you will have a retained income of $240,000 annually, or a net hourly income of $115.38 based on working 2,080 hours a year.

This is an increase in retained income as a percentage of 22.22%.

There is NO investment risk, NO market timing, just BETTER utilization of the existing tax codes as their intended benefits. You’ll experience a higher return dollar for dollar than any advisor could ever return simply by retaining more of your earned income. If you add a small conservative return to this, your return can range in the high 20% each and every year.

Options to adequately anticipate and pre-fund retirement medical costs

Medical care and having sufficient disposable assets to pay for it will be the single largest expense you will undeniably face at one time or another in your retirement years.

Pre-funding medical costs on a tax-deductible basis can improve current profitability and decrease the rate of capital depletion during retirement.

Whether you are self-employed or working for a company, you are to some extent at the moment insulated from issues facing millions of current retirees each year; that being the long term cost of medical coverage.

Even modest coverage is frightfully expensive especially when considered for an extended period. To say a large capital outlay is required is an understatement. Additional factors may compound the costs; your age, double-digit increases which are expected to continue unabated for years to come, and the likelihood or risk of having a pre-existing condition at some point in time which precludes many from coverage even if you can afford the premiums.

Medical coverage or expenses are generally absorbed by your practice while working. Typically, these costs are reflected as expenses and are calculated back into your practice simply as another cost of doing business.

Once you retire, these costs are reborn as after-tax expenses and are no longer deductible expenditures without the benefit of your practice. You will be paying medical premiums with after-tax dollars.

For every dollar spent on health care assuming you’re only in a 30% tax bracket, you will have to earn $1.45 as pre-tax income before $1.00 is available. In states where the combined tax rate approximates 50%, $2.00 in before-tax income is required before $1.00 is available.

Social Security and Medicare are drastically changing what they will pay or cover. A larger than anticipated portion of your pre-tax income will have to be permanently allocated and taken out of circulation for health care costs at the expense of life’s other pleasures for the remainder of your life.

Monthly premiums and co-payments are tied to your income; with incomes less than $80,000 there is one premium, over $80,000 annual for a single person there’s a higher premium, and for married couples its $160,000. That’s right! Your benefit and outlays are income sensitive unlike in previous years. The higher your income, the less you’re entitled to unless you agree to a larger monthly payment and or a higher yearly out-of-pocket expense. What I believe people will find shocking is the total cost individuals will pay for government issued medical coverage assuming retirement age is 65 and death occurs either at age 90 or 95. Individual premiums and co-payments for this 25 -30 year period are expected to cost individuals between $300,500 and $558,000 depending on health care inflation per person until death at age 90. By extending coverage to age 95, the cost skyrockets to between $615,000 and $907,000 per person.

Now, take this off the top of your retirement income each month or subtract it from your capital account. How will this directly affect your long-term spending habits? I suspect it will put a crimp into some of your plans regarding your security and retirement.

• The medical coverage premium from above was just for the basic costs of government issued health care coverage which only covers about 50% of the coverage you’ll need.

• How many of us want to be saddled with this and only this type of coverage? Consider what this basic coverage doesn’t or can’t cover in the future.

• A onetime major medical treatment can cost $40,000 or more assuming there are no on-going rehabilitation, other medical services or medication required.

• Medical prescriptions, co-payments, rehabilitation due to disease or injury, and major medical conditions like heart attack, limb, hip or joint replacement, and prescriptions costs have not even been factored in.

• Ask yourself this; how many of us know of an older individual who has cruised through retirement without a scrape?

• How many retirees have had or are experiencing medical ailments or lingering physical limitations? This doesn’t even touch long term care facilities which frankly few of us at that point will have any say about, certainly not without considerable assets.

We, realistically, do not have the luxuries our parents had in expecting fully-funded and relatively low cost coverage. There was a book out a number of years ago titled “Who Moved My Cheese?” The emphasis was that people need to be flexible and adapt as work situations change. The cheese has not only been moved but we’ve already eaten most of it.

Being able to afford medical coverage beyond government plans to receive the care you want can be painfully expensive without eroding significant financial resources. Failing to change with the times and plan accordingly, by not understanding the future costs which for many of us aren’t that far away, could leave us destitute. With insufficient capital none of us can go back and relive the last decade and acquire the necessary capital.

Leveraging the sale of your practice to secure the greatest return for you and the purchaser

Unfortunately, there is a dramatic shift away from future dentists financially encumbering themselves (to the tune of $500,000 to $1 million or more to purchase a practice) with decreasing certainty they’ll ever be able to recoup this expenditure when they eventually retire decades into the future.

This phenomenon is not limited to the dental profession as business owners are now also discovering this new sobering reality. With the emergence of this trend and the obvious potential loss of what would have been retirement capital, those who are currently working need to learn how to immediately take advantage of every available opportunity. Otherwise, the reality will be that most will find themselves working well after they had expected to retire. The second realization is that they’ve missed out on beneficial strategies because they’ve come to rely on their accounting professional – as gatekeepers or pre-qualifiers of opportunities – costing them millions in lost wealth accumulation.

Selling your practice is not as simple as finding a buyer – that is if you want to sell the practice for your anticipated sales price. Structuring the sale of your practice can mean notably more money in your pocket and a practice that is more attractive financially providing a great incentive to any potential buyer for your practice.

While selling your practice may be simple enough, there is a very specific process you should entertain before you advertise your practice for sale to increase or sustain your asking price. This involves adopting strategies that will structure the sale of your practice to save the buyer a few hundred thousand dollars or more (depending on the sale’s price) and will make your practice unbelievably more attractive financially because years of debt repayment for the purchaser have been eliminated and you benefit from a reduced tax liability which could save you a few hundred thousand as well. These are substantial after-tax sums by any measure.

What if I described a strategy where the purchaser was able to claim approximately half of the purchase price as a taxable deduction, thereby reducing the overall amount the purchaser will eventually repay in the form of loans and interest when they finance the purchase of your practice?

What if the sale of your practice could be structured so it didn’t cost the purchaser $1.54 million to purchase your $1-million business or practice?

In this hypothetical scenario, the purchaser saves $240,000.

How much would the purchaser, depending, of course, on his occupation, have to bill in goods or services to generate a net income of $240,000?

If your profit margin were 10 to 20 percent, at 20 percent the gross practice billing would be $1.2 million to net $240,000.

With a 10 percent profit margin, the gross billing would increase to $2.4 million to maintain the same $240,000 net income.

Let’s relate this to man-hours: how many months are required for you to bill $1.2 million or $2.4 million?

By adopting tax-smart strategies, the deductions benefit the purchaser which will definitely facilitate the sale for the seller. This strategy drives down the total overall cost to the purchaser by a significant amount.

The other benefit is to the seller who is also able to immediately lower their tax obligation by making a contribution from a portion of the sales proceeds directly into their retirement plan – providing the funds are not required immediately.

The higher the sale price, the greater the potential savings to both the buyer and the seller. This type of innovative, strategic planning will help ensure you receive the highest price for your practice at a time when practice values are declining and fewer individuals are willing or qualified to assume large debts in a turbulent, unpredictable economy.

Using tax-smart strategies, the seller can make the practice more attractive to potential buyers, reduce the cost of purchasing the practice and increase the return on investment.

If having the availability of significant cash is one of your objectives, then appropriate protection and risk management strategies must be adopted which employ higher degrees of sophistication. A law suit is filed every thirty seconds in the U.S. Simply following the run of the mill advice of putting everything into a trust will not suffice.

By utilizing these and other strategic financial strategies, sustainable wealth is either created or accelerated. After all “It’s You Money!

If you answer affirmatively to the questions below, a Professional Benefit Plan may provide the benefits you are looking for.

1.      Do you consistently have more taxable income than you need to maintain your lifestyle?

Yes____No____

2.      If you had the option, would you take funds that you normally pay in taxes and place them in a tax deferral retirement plan, knowing the contribution is fully tax deductible?

Yes____No____

If yes, how large of a tax deduction do you need?                                                              $________

3.      How many owners and/or key people need this type of deferral?                                       ________

4.      For how many years are you willing to make this annual deferral? (Normally not less than 5 years unless age of 58 or older)                                                                                                                            ________

5.      Does your business or practice have a qualified plan in place?

Yes____No____

If yes, what % of salary does the company contribute to the employees?                         ________%

6.      Are you frustrated with contribution limits of your current plan?

Yes____No____

7.      Do you need additional deductions ranging from $40,000 to $350,000 per year including what you may already be deferring?

Yes____No____

8.      Is it important to you that the plan’s accumulated values be contractually guaranteed against loss?

Yes____No____

8.    Is protecting plan values from the claims of creditors and judgments important to you?

Yes____No____

9.    Are you concerned about efficiently transferring plan assets to your beneficiaries?

Yes____No____

10.Are you interested in the plan offering disability benefits to you at no additional expense?

Yes____No____

11.Understanding that your business must contribute a modest amount of the benefit to some employees, would you accept a plan that delivers 80% to 90% of the deferral to you as your benefit?

Yes____No____

 No; because individual input drives the type of plan which is designed.

Will it affect our 401(k) plan?

No, the Benefit Plan is in addition to any existing 401(k) or profit sharing. Existing pension plans usually do not impact them. This is an additional benefit for executive/owners only. Typically, you opt-out of the existing employee retirement plan in favor of the new one with enhanced benefits. Account balances in the 401(k) remain while your new deductions and contributions are made to the new benefit plan for you and those you wish to include.

Are the deductions really worth it?

You’ll have to decide that! A Professional Benefit Plan (if there are employees) separates the owner(s) out of the current 401(k) profit type sharing arrangement and installs the owners into a separate plan where a truly meaningful tax deduction is available, for example, annually between $80,000-$350,000.

Will you effectively increase the rate of return on my investment portfolio?

No; a Benefit Plan is unrelated to your investments. It is a separate, stand alone benefit plan with unique benefits, not intended for the rank-and-file employee. It can, however, return a 40% accumulation over after tax investing depending on the make-up of the plan.

I enjoy paying taxes. It’s my patriotic right. It doesn’t sound like your services are useful to me?

Probably not! Take 2 aspirins and call us tomorrow. I’m confident you will eventually determine you can find a better use for an extra million dollars than choosing to give it to our government! All kidding aside, let me ask you a few questions.

1. Is your business for profit?
2. Are you currently taking advantage of deductions and or write-offs available to you or your business?
3. Are you currently taking advantage of deferring money into a retirement plan?
4. Do you use an accountant to calculate how much tax you owe each year? Do you hope to pay as little as possible?

If you answered yes to any of the above questions, then you do understand that paying more than legally necessary in the form of taxes is not something you really want to do. This is the essence of a benefit plan. You may now have an additional tool with which to actively manage that liability.

My disposable income is such that I don’t think I can qualify for a Benefit Plan?

Perhaps you can. Let’s say you’re investing around $50,000 annually, with after-tax dollars. That would require about $85,000 in taxable income (tax of about $35,000) to net the $50,000 to invest. What if you could set up a benefit plan to help you invest the $85,000 on a pre-tax basis? Would you be interested in effectively lowering your tax bill and accumulating a nice amount of money in the process?

Our CPA handles all that. Are you suggesting we change CPA’s?

Absolutely not! They have an important role to provide you with an independent assurance that the tax savings are there. Your CPA will be provided the same type of information to verify and settle the deductibility issue. Once you’re assured the deduction is available, it becomes a business decision whether to take what you’re legally entitled to.

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

Contribution:                                                       $180,000

Retirement Income:                                             $120,000

Tax Rate – pre-retirement:                                          40%

Tax Rate – post-retirement:                                         40%

Investment Return:                                                      10%

Investing Pre-Tax Dollars

Contribution:                                                      $180,000

Retirement Income:                                            $120,000

Investment Return (age 53-61):                                5.00%

Investment Return (age 62-88):                              10.00%

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.

CPA’s, Tax Attorneys, and Financial Advisors

Business owners’ financial advisors (CPA’s, tax attorneys, and financial advisors) are often limited in their knowledge of professional benefit plans (OBP).

CPA’s

Generally speaking, CPA’s are knowledgeable in tax preparation and deductions, but cannot address operational or legal aspects of an OBP. Their expertise is tax deduction and deferral, but not plan design and operational aspects of professional benefit plans. ERISA codes govern OBP’s. CPA’s readily default to enrolled actuaries concerning ERISA code and OBP suitability. They also know that an enrolled actuary carries the liability concerning design and suitability for these plans.

Attorneys

To understand the limitations of attorneys with professional benefit plans, examine their orientation and training. Attorneys deal with legal questions and implications. They do not give opinions on the operational merits of a plan. Yet, this issue is the crux of where all forms of qualified plans usually fail a Department of Labor audit. Commonly, attorneys base opinions upon case law, especially with tax cases. However, legal information about professional benefit plans will not be found in court cases. This is due to the voluntary compliance process the Internal Revenue Service requires a business owner to go through to remedy a defective plan. These plans never become a court case because of the IRS’s compliance standard. Thus, there are no court cases that attorneys normally rely upon to determine case law. The authority is the ERISA codes, not the courts. The actuary is responsible for upholding the development of these plans in accordance with the ERISA codes and standards. His license and ability to practice could be lost if he develops a non-compliant plan.

Financial Advisors

Unless a financial advisor makes a living implementing professional benefit plans, this is no arena for part-time practitioners. Creating a plan with errors causes the plan to be disallowed, with years of deferrals reversed. What is the result? The owners or principals pay fines with compounding interest penalties. Worse yet, the non-deductible expense must be paid personally, not from a corporate account. This is a major enforcement rule of the Department of Labor. A plan properly designed through an actuary eliminates this risk. Proper design, installation, and administration through an actuary create immediate tax relief to the owner or executive and accelerated financial benefits result.

Who addresses operational concerns of a professional benefit plan? Why is this important?

Clearly, attorneys, CPA’s, and financial advisors are neither responsible nor liable for compliance or operational issues of an OBP. Under ERISA and the Department of Labor (DOL), the burden falls upon the licensed enrolled actuary. The DOL is the government agency that oversees all qualified plan operations, including 401(k), and assesses penalties for non-compliance. In 2003, the DOL imposed over $300 million in fines and penalties for qualified plans that were operationally non-compliant. Companysizes ranged from sole proprietorships to major corporations, some of which employ in-house plan administrators. The DOL’s audit rate has increased from 3% in prior years to an anticipated 8-11% for 2004 and beyond.

The opportunity is available, but who will do the job?

Here is the business owner’s crisis. Obviously, an enrolled actuary is necessary to create the structural integrity and proper implementation of an OBP as a sound and legitimate retirement investment. However, business owners today feel the impact of complex ERISA codes and prior laws of Congress even though repealed. Baby boomer owners, professionals, executives and highly compensated individuals now have the legal freedom to have OBP’s again. They also have the need. But, now that the opportunity is here, who will do the job?

Even if owners recognize the power of an OBP for themselves, how will they find the right person to create it? The demand and need for an actuary’s expertise far surpasses the supply. The decisions of Congress in the past created the current “brain drain” of actuarial expertise. Most actuaries with these skills either retired or left the profession after two decades because they could not financially sustain their career during the near dormant years. Now there is a scarcity. It will take newer, younger actuaries years to develop a thorough understanding and knowledge of the implementation of the codes requisite for effective OBP plan design. They may be familiar with the past five to seven years, but they do not know the complexities and tax exceptions that occur over a fifty-year span of law. An actuary with this knowledge and experience is necessary to design and implement these plans.

Yet, soon-retiring business owners cannot wait. This level of competence is exactly what is needed to design and implement complex professional benefit plans. Unless an enrolled actuary has been involved on an on-going basis with professional benefit plans for a minimum of several decades, they would not have the ability to create such specialized plan designs that meet ERISA standards and individual owner needs.

This is often a question not only of the client but often a CPA’s response as well.

Certain assumptions made by CPA’s are causing their clients to pay considerably more in unnecessary taxes than absolutely necessary. Frequently CPA’s give verbal instructions which are based on personal opinions rather than on substantive reasoning or factual data. We must assume the CPA advice is well intended, but frankly often their advice just falls short under close scrutiny, and here’s why.

First of all the CPA is making one huge assumption, the client on their own will routinely make sizeable consistent contributions for retirement. Statistics indicate otherwise. Secondly, the most frequent response why successful people don’t make large retirement contributions is because they’re told they can’t. For many the size of the savings doesn’t warrant the effort. Yet the staggering dollar amount of capital or investments needed at retirement allowing us to live for another 20-30 years for practically everyone is shocking. This will be further examined below.

Examining the numbers:

A client is currently living on $200,000 of taxable income and wants to be able to maintain their lifestyle. The client will need $5,537,692 in cash at the onset of retirement to be able to fund only a twenty-year retirement. For thirty years, the need increases to $7,484,728, after which in either scenario all the money is spent. Remember these amounts are needed at the onset of retirement. One major consideration we’ve ignored is health care costs. Assuming you will live the rest of your years without any major medical or health care issues and long term coverage is optional, then the numbers work. If health care as an expense is included then you will need to increase the accumulation goal by at least $500,000 per person.

What is closer to what most people will actually experience?

Regardless of individual desires, most people will have to settle for a more modest retirement and lifestyle, due to the lack of accumulated assets or wealth. With a desired pre-tax retirement income of $100,000 per year and a life expectancy of 20 years the accumulated amount would have to be $2,768,846, and with a life expectancy of thirty-year you’ll need $3,742,364. After actively working with people for two decades, what I see is that regardless of income levels, few individuals are anywhere close to being on track. Where we as a population seem to think the money will come from is a mystery to me.

What is the most efficient method of accumulating capital without taking the next ten to fifteen years to do so?

Working longer is always an option, but certainly most of us want the option not to have to. What is frequently overlooked regardless of how long a person will work is unanticipated health issues. Suddenly the opportunity for continued work isn’t possible. In these circumstances, unless there are already millions tucked aside there will be a liquidation of other assets at some future date.

What’s the fastest way to accumulate the largest amount of cash in the shortest time? The answer is, eliminate or greatly reduce what you are spending in the form of unnecessary tax payments to the federal government. By eliminating or greatly reducing those quarterly or annual payments and depositing them directly into your plan you accelerate your net worth without additional labor by no less than 40%. Add tax deferred growth and compounding and your account balance will in a few short years accelerate to a sizeable amount. The chart below compares after tax investing against pretax accumulation. Note: given the same net income which scenario runs out of money first?

Here’s what each chart reflects:

There is the same contribution in both except one is after-tax and the other is a pre-tax contribution. Both charts assume an annual 10% return for each contribution year. The glaring difference is with the after tax chart we continued the 10% assumed rate of return until all the money was paid out. The pretax chart illustrates that once distribution occurred, the rate of return was reduced down to 5%, meaning the after tax chart has a huge advantage.

Both charts reflect a 40% tax rate.

In the after tax chart you will notice the Pre-Return Tax column, we are allowing there will be some tax each year on the accumulation due to dividends, unrealized capital gains, etc.

In the tenth year we pay out the same net distribution for each chart. Notice in the pre-tax chart that in the tenth year there is already $700,000 more in the fund column than with the after tax column. Moving to age 78 the after tax column is out of money, while the pretax chart continues to deliver a constant income for another decade.

The conclusion: the numbers accurately reflect without bias what someone might actually expect to accumulate over a few years. It correctly shows what has widely been known for decades. Any time you have the use of not only your money but Uncle’s portion as well, and you include tax deferred compounding there really is no way but to out-perform pre-tax investing. To come close with after tax investing you would have to have had in excess of a 20% return each and every year without any market fluctuations. Remember we also gave the advantage of excess returns during the distribution phase to the after-tax column as opposed to the lower 5% return in the pre-tax column during the distribution period. Even then the after-tax lags far behind.

It’s safe to assume not all situations lend themselves to this form of accumulation for a variety of reason. Knowing this, there are strategies which will work to help accelerate and secure the amounts you wish to invest. Knowing what drives and motivates you to work and live, to support whatever lifestyle you have is at the core of all planning opportunities. There are other options.

In a nutshell…

Originally, Owner Benefit Plans were widely used and popular. Then, for a few decades, Congress tied business owners’ hands regarding personal retirement planning. It took Congress years to wake up to the consequences of their decision. Recent Congressional changes in 2000 opened up again an amazing opportunity for business owners. Suddenly, Congress realized the relationship between meeting the owner’s and the employees’ retirement needs. Both need to be addressed and are interrelated.

The story behind Congressional changes

There are four distinct phases to the history of Owner Benefit Pension development and usage.

Phase I — 1950′s-1974 Owner Benefit Plans freely used.

In the early years, large, publicly-traded companies installed Owner Benefit Plans. Executives received these “golden parachutes” upon their departure. At that time, it simply was not profitable to offer similar benefits to owners of smaller businesses. The plans gave little or only modest protection and benefit to “rank and file” employees.

Phase II — 1974-1985 Congress passed ERISA: Employee Benefits & 412(i) Owner Benefit Plans.

In 1974, all this shifted dramatically. The ERISA (Employee Retirement Income Security Act) law passed. This created great protection to employees, and the consequences for business owners were profound. How did it affect them?

ERISA ushered in a new age of protection for the average employee. It introduced new eligibility rules, changed vesting requirements, imposed limits on contributions (so called “top heavy” rules), mandated a host of reporting requirements, and instituted numerous other rules and regulations governing qualified plans. Since 1974, nearly every succeeding tax act further tightened and restricted an owner’s ability to provide meaningful retirement benefits to themselves with fully deductible contributions to a qualified plan. Increasingly, the owner found himself in a double bind. In order to build personal retirement benefits, he has to provide larger benefits to employees.

However, ERISA had a silver lining in the cloud of employer restriction. It formalized, through the adoption of Code § 412(i), the lesser-known fully-insured defined Owner Benefit pension Plan. This gave business owners, executives, professionals, and highly compensated individual’s tremendous power for retirement preparedness. As never before, they had the ability to receive tax deferrals and retirement plan contributions that resulted in an accelerated retirement account accumulation. These quick accumulations had a positive, profound effect upon owners and principals.

Phase III — 1986-2002 Congress passed Code §412(e), which bound owners’ personal retirement.

In 1986, business owner’s retirement opportunities radically and detrimentally changed. Attempting to control qualified plans and business deductions, Congress passed Code § 412(e). This devastated business owners’ retirement planning. Section 415(e) required very complicated actuarial calculations between defined benefit and defined contribution plans. Establishing or continuing many Owner Benefit Plans became nearly impossible, except for the largest and publicly-traded companies. As a result, most businesses discontinued using these types of plans. They moved to defined contribution plans, 401(k)’s, or no plan at all.

Meanwhile, owners’ frustration and anger grew. Increasingly, the government prevented them from taking meaningful deductions that prepared them for their own retirement. At the same time, many enrolled actuaries [those with the expertise to design and implement Owner Benefit Plans, especially 412(i) plans], either left the profession or retired, out of frustration and inability to adequately practice their trade. The exodus caused a “brain drain,” a great loss of knowledge and expertise beneficial to business owners. Consequently, today there are but a handful of licensed enrolled actuaries in the nation who are capable of this work.

Phase IV — 1999, 2000 Congress repealed Code §415(e): A new era, retirement direction, and opportunity begins for business owners.

Finally, Congress woke up. Following almost two decades of increasing regulation and restrictions to 412(i), Congress realized that small business America was not adopting and funding pension plans. This hurt both employers and employees. Congress also became alarmed because so many “baby boomer” business owners were approaching retirement unprepared and disempowered. With the uncertainty of the social security system, Congress acknowledged that the only way to have highly compensated individuals accumulate enough money for retirement was to allow for proportional deferrals.

At last, Congress acted. They repealed Code §415(e), effective January 2000. Now, business owners again have the ability to take charge of their own retirement needs. But Congress did not stop with that step. In H.R. Rep. No. 107-51, pt.1, Congress states:

“One of the factors that may influence the decision of an employer … to adopt a plan is the extent to which the owners of the business … will benefit under the plan. The Committee believes that increasing the dollar limits on qualified plan contributions will encourage employers to establish qualified plans.”

As a result of this “new” thinking in Congress, several modifications to existing rules and new rules were passed under the Economic Growth and Tax Reconciliation Act of 2001 (EGTTRA-2001.) These new rules took effect on January 1, 2002, and marked the beginning of a new era in pension planning for business owners and professionals.

Under these new rules, business owners and professionals again have a powerful retirement opportunity through Owner Benefit Plans. The opportunity is possible as long as modest benefits are offered to employees that qualify for plan inclusion under some design formats. Using specialized actuarial methods, it’s possible for owners to place into their personal retirement accounts between 85% and 92% of all contributed deferred dollars.