Call us at 818-769-4600. Ask for an Actuary. No fee for initial consultation. We will help you plot out your own course on desired contribution levels, in the context or your specific company and needs. We need some information from you, and then we can give you options, right on the phone. "Information We Will Need"

NOTE: As a business owner, you have a long time frame in which to make the pension contribution. For example, if your fiscal year end is December 31, 2002 then you have until September 15, 2003 to make the contribution, provided your CPA gets an extension on your business tax return. Or, if you want, you can make the full contribution on January 1, 2002. That's over a year and a half.

If you aren't already convinced of the general value of having a pension plan, we'll show you four examples of actual situations that may change your mind.

Before setting out the numbers, we need to make 2 things clear about what happens often in reality if you as a business owner do not have a pension plan as a vehicle for savings:

1) Statistically, you will tend to save quite a bit less

2) Statistically, you will tend to spend the saved money quite a bit sooner

Many business owners who do not have pension plans tend to have their savings principally in real estate and the value of their business. Savings is becoming more important these days, and having a pension plan is both a good discipline and a wonderfully tax-sheltered vehicle for these savings.

Also, the illustrations below ignore three extremely important sources of tax savings to you the business owner:

1) when you put the money into the pension plan from the company, you save Social Security taxes, and when you pull it out you don't pay Social Security taxes

2) the illustrations below show the result of pulling the pension plan money out in a lump sum at some future age, whereas in the real world, you can CHOOSE how much and when you pull out so as to minimize your taxes...you will take the monies out over a number of years STARTING with the date down the road, and perhaps pay lower taxes as a result of your making choices; because you will be taking out over a number of years, you will be enjoying the tax benefits of deferral of income taxes on your investment earnings well into retirement, which is a large economic benefit

3) you can make other choices, such as to move to a zero income tax state, or outside the U.S.; this would represent another significant tax benefit not available to you if you don't start a pension plan

Example #1

A business owner, age 50, has no employees and $150,000 net income from the corporation (or sole proprietorship) after expenses, which can be used for salary and pension. He has no other companies that have employees, no independent contractors who might be classified as employees, no prior pension plans, and the ability to put up to $50,000 in a great year into a pension plan. His spouse also works in the business, but has not been paid a salary because they wanted to save on FICA taxes. The owner has been in business for 5 years.

He was thinking of opening a Profit Sharing Plan and putting $20,000 per year into this plan.

If $20,000 per year is what they want as a maximum contribution for this year and each future year, then he should adopt a Profit Sharing Plan, and put in the $20,000 per year. If they do this for 15 years, and invest the money to earn 7% per year, then at 65 they will have $502,000 in the plan. If they then cash this all in they will have left over about $301,000 (assuming 40% taxes for sake of argument).

On the other hand, this has only cost them out-of-pocket 60% of $20,000 per year (i.e. after the 40% tax they would have paid if they had not had a Profit Sharing Plan), times 15 years, or 0.6 x 20,000 x 15 = $180,000.

To get the $ 301,000 result after tax NOT USING a pension plan, the owners would have had to have an investment yielding 11.8% pre-tax for 15 years, versus the 7% USING a pension plan.

On the other hand, if they earn more than 7% in the Profit Sharing Plan, say 12% for 15 years, then they will have $745,000. If they cash this all in at age 65 they will have left over $ 447,000 ( assuming 40% taxes).

To get the $ 447,000 result NOT USING a pension plan, the owners would have to have had an investment yielding 20.0% pre-tax for 15 years.

Obviously, with a pension plan you get the big deduction for taxes when you put the contributions in. Also, and less obviously but still very importantly, the business owners also get a much bigger amount from the investment earnings; this latter is due to the fact that there are no income taxes payable until the owners pull the money out down the road.

We could quibble about the exact numbers and methodology, marginal income tax rates, and about alternate investments NOT USING the pension plan, but the bottom line results for most people would be as above. In essence, the IRS is paying for this tremendous benefit you have as a pension plan sponsor, by NOT making you pay taxes each year on your annual investment earnings in the pension plan. What a deal...the IRS paying for you to build a financial fortune.

Example #2

If our same owners can afford a higher contribution in good years, say $80,000 per year, and retain the right to cut back in bad years, then we would recommend a Defined Benefit Pension Plan. If they earn 7% and contribute $80,000 per year they will accumulate $2,010,000 at age 65. If they earn 12% per year they will accumulate $2,982,000 at age 65. Not bad for an out-of-pocket of 0.6 x 80,000 x 15 = $720,000.

If they don't have a pension plan, then they would have to find investments yielding 11.8% (to match the pension plan 7%), and 20.0% (to match the pension plan 12% pre-tax). But, if they have access to investments yielding 11.8% or 20% why not have the pension plan, and use the pension plan assets to buy these investments?

The maximum annual contribution for any one person to a one-person Profit Sharing Plan is 15% of Compensation to a maximum of $25,500 for years ending 12/31/2000.

Example #3

If our same business owners can easily afford $ 20,000 per year, but think that they might want to put in $50,000 or more in a good business year, then we would recommend a Defined Benefit Pension Plan. With this plan, the owners can choose higher contributions in good years, and cut back to lower or zero contributions in lean years.

Example #4

Just to use a different example, let's say you are 35, and have the ability to put away $20,000 per year into a pension plan. If you use either a Defined Benefit Pension Plan, or a New Comparability Profit Sharing Plan, then if you earn say 10% per year from age 35 to age 65 you will have $3,290,000 in the plan at age 65. It has cost you 0.6 x 20,000 x 30 years = $360,000 in lost spending. Well let's see...the difference between the 3,290,000 and the 360,000 is made up of (a) the tax deductions of .4 x 20,000 x 30 years = $240,000, and (b) $2,690,000 in investment earnings. See what we mean about the fact that the investment earnings are not taxed each year is such a big deal to your building a huge fortune, and that this is a major gift from the IRS to you?

The above example #4 also illustrates how important investment earnings are if you leave part of your pension fortune to your children and grandchildren, by doing the proper paperwork and having us as pension experts even after you retire. If your pension benefits can be paid out over a 20 year period to your kids and grandkids, the investment numbers are even better than the above Example #4.

We could easily build in a few employees into this example #4, and illustrate that even if you gave them each 5% of Compensation as a pension contribution each year under either a New Comparability Profit Sharing Plan, or a Defined Benefit Pension Plan, you will have far more of a fortune at age 65 or whenever you want to see it at and gloat over it, than if you don't adopt a pension plan and watch others get your tax gift from the IRS. What we would rather do, however, is have you send us a list of your employees so we can figure out a scenario or two with you on your projected pension fortune and employee costs and benefits. This way, it is your exact scenario, not a hypothetical example.

Call us at 818-769-4600 and get us your details. Ask for an Actuary. Let's get this 30 year airplane trip planned out.

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