Customized Retirement Plans

Customized Retirement PlansBy Oliver Wilson, Staff Writer

Coming at the rear end of a long list of requirements and necessities competing for attention, retirement plans for both employer and employees are often disposed of with a quick fix such as readily available and IRS compliant 401(k) plans. The problem with these off the shelf plans is that you often end up under utilizing the benefits of a retirement plan, since the plan has not been tailored to match your resources or requirements.

A comprehensive solution is a customized and layered retirement plan, which makes use of two or more tax deferred savings options, making strategic use of your resources and adding value to the amount which you, as an employer, can plow into a retirement savings vehicle.

The factors you need to consider are the savings required, amount you are ready to put into the plan and IRS guidelines and limitations for the kind of plan you want. First thing you need to decide is if a group plan, which includes yourself as the employer and others as employees, is what you want. If your intention is to provide a fair and equitable retirement plan for all parties concerned, that’s one thing. If you want to build yourself a nest egg in high six figures, that calls for a totally different retirement strategy.

Plans for Owners:

If you are looking at putting less than $20,000 in annually into the plan, it is much easier to use a SEP-IRA or a safe-harbor 401(k) plan, which allows you to bypass the restrictions imposed on more expensive 401(k) plans.

Safe Harbor 401(k):

The key advantage here over traditional 401(k) plans is that on account of preset contributions for each employee (3% of compensation or a matching contribution), employers can put in maximum allowable contributions into their own plans without being subject to complex annual nondiscrimination tests. Additionally, employees get the benefit of employer paid contributions, without having to put up any of their own money.

Cross Tested Profit Sharing Plan:

This plan tilts heavily in favor of the employer and senior or key employees who have been there for a relatively longer period. Contributions to this plan can be made based on age and the length of the each person’s association with the company. Thus employers get considerable leeway to fund their own plans with bigger amounts than those available to employees.

A Customized Plan:

In order to achieve your personal retirement savings targets, it sometimes becomes necessary to create a retirement plan which combines the benefits of two or more types of retirement plans for employees. If you are looking for a retirement plan for employers which you can fund in excess in $100,000 annually, it would be prohibitively costly, if not impossible, under current IRS limitations. The solution is to find the right mix of plans and tax savings. For example, a customized plan, which included a combination of all three of the above plans, would help you reach the $100,000 target, fund each employee’s plans with the requisite amounts required under each plan and end up with tax savings in excess of the total amount spent on funding the employee plans.

Please note that the benefits offered by customized and combined retirement plans may vary depending on the size of your company, demographics of your employees and currently applicable IRS regulations. Please refer to both the IRS and your financial planner before you make any decision.