May 23, 2019 | 12:09 PM


30.10.2013Why You Really Need A Retirement Plan

As I often say to clients, your first obligation is to yourself.

Stephen J. Dunn, Forbes.com

You cannot rely upon Congress to provide for the long-term solvency of the Social Security trust fund.   You need to provide for your own retirement.  As I often say to clients, your first obligation is to yourself.

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There are many other reasons why you need a retirement plan. 

Shelter income from current tax.   For 2013, the annual limit for an employee contribution to a defined contribution retirement plan is $17,500, or $23,000 for an employee who has reached age 50.  The annual employee-employer combined limit for contributions to a defined contribution plan is $51,000.

Assume, for example, that you are 51 years of age and that your business has a defined contribution retirement plan.  For 2013, the maximum amount of your compensation which you can defer into your plan account without incurring current income tax on it is $23,000.  The maximum contribution that your company can make to your plan account for 2013 and deduct on its tax return is $28,000.  These contributions may be made to your plan account only to the extent they are allowed by the plan’s governing document.

Larger amounts can be contributed to a defined benefit pension plan by an employer with respect to an employee.  Very expensive to administer, requiring annual actuarial valuations, defined benefit plans are uncommon today.

The annual limit for contributions to an individual retirement account is $5,500, or $6,500 for an individual who has attained 50 years of age.

Qualified retirement plan assets will eventually be subject to income tax, when they are withdrawn from the qualified plan—unless the beneficiary is an entity exempt from income tax. 

Protect assets from creditors.  Qualified retirement plans are immune from creditors’ claims.  For this reason qualified retirement plans are popular among persons vulnerable to creditors’ claims—such as physicians.  The immunity from creditors’ claims applies to qualified pension or profit-sharing plans, but not unfunded plans maintained by an employer for a select group of highly-compensated employees (so-called “top hat” plans), or individual retirements accounts.

A qualified retirement plan interest is, however, an asset subject to equitable division upon the participant’s divorce.

Provide a benefit for employees.  A qualified retirement plan is an attractive benefit for employees.  This is especially true if the plan provides for employer matching contributions.

Resolve a tax collection matter more favorably.  If you owe tax which you cannot currently pay, your current income will determine the amount you will have to pay each month under an installment agreement with the IRS.  Establishing a qualified retirement plan, and making a monthly contribution to it, will reduce the amount of your monthly income, and thus the amount you will have to pay the IRS each month under the installment agreement.  In effect you will be paying yourself rather than the IRS.

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