If you had been given proper advice and direction as a 20-year old, opened a retirement account and never let any earthly desires interfere with you maximizing your contributions for the next 45 years, you would be a happy 65-year old sitting on a portfolio worth several million dollars.
Unfortunately, life does not work that way for most of us. Things happen and the best laid plans can be unraveled in no time at all. That’s what happened to Whit J.
Whit and his wife raised 3 children, who all went to college and ended up with great careers. Two divorces later, Whit suddenly found himself in his mid 50s with some cash in the bank, but no retirement account.
Sure, he could set up a Sep-IRA or a small 401k, but the contribution limits would not get him to where he wanted to be at age 67. However, there is a way that will allow him to make large contributions and give him a terrific tax write off at the same time.
Whit’s saving grace is that he single handedly runs a small consulting firm which grosses over $300k per year. Being single, that means that the IRS takes a huge bite out of his earnings.
He would be a perfect candidate for setting up a Defined Benefit Plan (DB). I ran the numbers via my custodian/actuary and the result showed that Whit qualifies to make an annual maximum contribution of $150k, which would be a write off on his taxes.
Whit may decide that $150k is too much considering his lifestyle/business obligations, but $100k is more in line with what he feels he can contribute annually over the next few years. This will give him the opportunity to play catch up and still build a nice nest egg for his eventual retirement.
If you are in a similar situation, you might want to look into this type of plan. There are some strict requirements compared to conventional retirement options. Here are some of the important ones:
1. Once you commit to an annual amount, you are required to contribute the same every year for the duration of the term.
2. You are supposed to earn a return of at least 6% per annum. If it’s less, you need to make up the shortfall.
3. If your business is slow, you are allowed to make your contribution from other sources (savings, loan, etc.)
4. Defined Benefit Plans can be managed by an advisor
This type of DB plan can also work for any high income employee over 50 years of age, as long as he doesn’t have an existing retirement account of any substantial means. Keep in mind that there is more to DB plans than outlined here. I wanted to give you an introduction about its existence; if you have more questions feel free to contact me.