Categories
Retirement Plans

Maximum Pension Limits for 2021

Overview

Many employee benefits are subject to annual dollar limits that are occasionally increased due to inflation. The Internal Revenue Service (IRS) recently announced cost-of-living adjustments to the annual dollar limits for various welfare and retirement plan limits for 2021. Most of the limits will remain the same, but some of the limits will increase effective January 1, 2021.

The following are some important limits in effect for 2021:

  • Maximum compensation for plan purposes is $290,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $19,166.67 with an annual benefit $230,000
  • Highly Compensated Employee compensation $130,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $58,000
  • Maximum SEP Contribution $58,000
  • Maximum 401(k) Contribution $19,500. Catch-up Contribution for age 50 and over $6,500
  • Maximum SIMPLE Contribution $13,500

Plan Ahead

Employers should update their benefit plan designs with these new limits, and make sure that their plan will reflect the new 2021 limits. Employers may also want to communicate the new benefit plan limits to their employees.

Click here to read the full IRS announcement.

Categories
Retirement Plans

What happens if you live too long?

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[Transcript]

So why retirement plans?

Why do businesses want to put their money there?

Their hard-earned money…

First of all everybody knows Americans, just in general are not saving it up for retirement.

We’re always worried about dying too soon…

But what happens if we live too long?

What then?

What do we do?

We don’t have the resources in our retirement years.

This is why a retirement plan is fabulous!

Put money away now in your peak earning years.

Businesses can put this money away all on a tax-favored basis so they save now and plan for tomorrow.

And for this reason defined benefit plans and defined contribution plans are fabulous planning options for business clients.

Categories
Retirement Plans

Advantages to a Qualified Retirement Plan

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[Transcript]

So some of the advantages to qualified plans are first of all unlike other employee benefit plans, you are not limited based on your business structure.

Yes, it’s an employee benefit plan and what that means is it’s exclusive for businesses and business owners however any type of business structure qualifies…

That’s S-Corps to C-Corps to LLCs…what else, Partnerships, even Sole Proprietors and even better yet a one-person company constitutes a company that is eligible to qualify for this type of plan.

Any size business, if it’s only an owner, employee, there’s no other employees…

No problem!

They’re eligible to qualify for a plan and establish a defined benefit or a defined contribution plan.

They have 10 employees, 100 employees, 1,000 employees…

Every company can establish a defined contribution or a defined benefit plan.

We can also offer designs and structure plans where we can have a defined benefit plan which was a little more meaningful, allows for higher contributions which means potentially more favorable tax treatment.

And we can also add a profit sharing or 401(k) plan component so companies can have 2 types of plans at the same time.

They’re not limited to just one qualified retirement plan.

Categories
Retirement Plans

401(k)’s are Killing Business Owners Retirement

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[Transcript]

Right now one of the biggest secrets is that 401(k)’s right now are killing business owners retirement.

See the problem is that most business owners are looking at defined benefit plans like 401(k), SEP, simples of those type of things.

In 2019 they are limited by only being able to contribute $19,000 and another $6,000 if you’re over age 50.

In a simple plan, it’s limited even further by $13,000.

So what happens is the owner who’s at risk who is making sure that everybody has employment is being treated as the most junior as the most junior staff is.

Seems a little unfair…

With a defined benefit plan, you can set a plan up so that that business owner is getting the lion’s share of the benefit and what those plans can offer is the largest tax deduction.

Currently available under the IRS codes you can help defer reduce or even eliminate some of your stock market risk, you can use those benefits to buy estate planning tools, and as of 2019 you can guarantee an income of up to $225,000 a year guaranteed for life.

It’s a much better way of offering things to an employer instead of a 401(k).

Categories
Retirement Plans

Maximum Pension Limits for 2019

Each year, the IRS sets limits for pension plans. These limits are reviewed annually and adjusted for inflation. The following are some important limits in effect for 2019:

  • Maximum compensation for plan purposes is $280,000
  • Maximum monthly benefit for defined benefit plans ages 62 to 65 is the lesser of 100% of compensation or $18,750 with an annual benefit $225,000
  • Highly Compensated Employee compensation $125,000+
  • Maximum Defined Contribution / Profit Sharing Contribution $56,000
  • Maximum SEP Contribution $56,000
  • Maximum 401(k) Contribution $19,000. Catch-up Contribution for age 50 and over $6,000
  • Maximum SIMPLE Contribution $13,000

CLICK HERE for a PDF copy of the 2019 limits.

Categories
Life Insurance Retirement Plans

Use of Life Insurance Inside Retirement Plan

Qualified retirement plans offer many different investment options.  One option, which is often overlooked, is life insurance.  Under the right circumstances, life insurance can be an attractive investment option for a qualified retirement plan.

There are two basic types of qualified retirement plans.  The first is a defined contribution plan.  In this type of plan, the annual contribution is defined, but the ultimate benefit is not.  Annual contributions are based on a formula set forth in the plan document, generally a percentage of compensation.  Contributions are held in accounts established for plan participants and invested.  The amount of retirement income available to a participant depends upon the investment performance of his account.  401(k) and profit sharing plans are examples of a defined contribution plan.

The second type of qualified retirement plan is a defined benefit plan.  In this type of plan, the ultimate benefit is defined, but the annual contribution is not.  The annual contribution is the amount required to ensure that the plan has sufficient assets to fund the participant’s defined benefit at normal retirement age.  The annual contribution is actuarially determined and may fluctuate depending upon investment performance.  However, there is a type of defined benefit plan, known as a 412(e)(3) plan, where contributions do not fluctuate.  A 412(e)(3) plan is funded with guaranteed insurance company products.  Contributions to a 412(e)(3) plan do not fluctuate, because the investment return is guaranteed by the insurance company.  Investment options in a 412(e)(3) plan are more limited than in other defined benefit plans.

Both defined contribution plans and defined benefit plans may provide death benefits, as long as the death benefits are incidental to the primary purpose of the plan, which is to provide retirement income.  A plan’s death benefits can be funded with life insurance contracts.  The IRS has established two tests to determine whether a plan’s death benefits are incidental.  The first test limits the amount of plan assets spent on life insurance premiums.  This test is usually used in defined contribution plans.  The second test limits death benefits to an amount equal to 100 times the plan’s monthly retirement benefit.  Either test may be used in defined benefit plans.

The following are some of the benefits of using life insurance in a qualified retirement plan:

  • Additional benefit for employees
  • Income replacement
  • Protection from creditors
  • Death benefit may be received income tax fee (less tax on the fair market value of the policy’s cash surrender value)
  • Portable benefit
  • Employer provided death benefit may replace insurance paid for by employee
  • Higher benefit at death

Generally, a retirement plan may not provide a death benefit once a participant has attained normal retirement age and retired.  If the participant desires to maintain the life insurance protection, there are a number of options.  The plan can distribute the policy to the participant, who is then required to include the fair market value of the policy in taxable income.  Or, the participant can purchase the policy from the plan for its fair market value.  As long as the participant pays the fair market value for the policy, there should be no tax.

The rules regarding the use of life insurance in qualified retirement plans are complex.  RMC Group is here to assist you in helping your clients determine whether to include life insurance in their qualified plans.

Categories
Life Insurance Retirement Plans

Retirement Benefits

At some point in our lives, we all think about retirement. However, a business owner, who has spent most of his life growing his business, may not have had the time or the money to implement a retirement plan. As a business prospers and matures, the owner may be able to invest in his business, enjoy life and save for retirement. By funding a retirement plan, a business owner can ensure a comfortable and well-earned retirement. Whether a business adopts a Profit Sharing Plan or a Defined Benefit Plan depends on several key factors.

The first consideration is income and cash flow. Since contributions to a Profit Sharing Plan are generally lower than contributions to a Defined Benefit Plan, a Profit Sharing Plan may be ideal for a new business with limited resources or unpredictable revenue.  Contributions to a Profit Sharing Plan are based on a uniform percentage of compensation and can be skipped in years when there is insufficient revenue. The maximum contribution for 2019 is $56,000 per employee.

A Profit Sharing Plan can include a 401(k) Plan.  A 401(k) Plan allows an employee to defer a percentage of his salary to the Plan.  The maximum deferral for 2019 is $19,000. In addition, an employer older than age 50 can make a “catch up contribution” of $6,000. The amount deferred by the employee is excluded from taxable income.

Unlike a Profit Sharing Plan, in which the monthly retirement benefit depends upon the investment performance of the contributions to the Plan, a Defined Benefit Plan sets the monthly benefit to be paid at retirement and requires annual contributions sufficient to fund the ultimate benefit. The maximum monthly benefit for 2019 is $18,750.  Contributions are based on the amount needed at retirement to fully fund the benefit.  A Defined Benefit Plan works best for a business with predictable annual revenues to support larger contributions to a retirement plan.  There are two types of Defined Benefit Plans – Traditional and Fully Insured. A Traditional Defined Benefit Plan can invest in any prudent investment. In addition, annual contributions are determined by an actuary, who calculates the minimum and maximum contribution. This provides a degree of flexibility not present in a Fully Insured Defined Benefit Plan.

A Fully Insured Defined Benefit Plan can invest only in insurance and annuity products that guarantee the benefit. Because a Fully Insured Defined Benefit Plan is required to invest in guaranteed insurance and annuity products, the retirement benefit is guaranteed by the insurance company as long as contributions are made.  A Fully Insured Defined Benefit Plan requires the largest contributions.  In addition, a Fully Insured Defined Benefit Plan eliminates possible losses due to market fluctuations. This guarantee is often a major consideration when planning for retirement.

Now is the time to determine if a retirement plan is right for you. The plan has to be set up by the end of the company’s tax year in order to make a deductible contribution for 2019. For more information or to get started on your retirement benefits today, contact RMC Group at 239.298.8210 or [email protected].