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Retirement Plan Funding Dynamics: How Retirement Plan Variables Affect Funding Outcomes

Retirement Plan Funding Dynamics: How Retirement Plan Variables Affect Funding Outcomes. Jack Lawless, CPA, APM Pension Strategies, LLC DFW FPA Platinum Sponsor. Objectives. Identify the variables that play a roll in funding options when looking at a Qualified Retirement Plan.

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Retirement Plan Funding Dynamics: How Retirement Plan Variables Affect Funding Outcomes

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  1. Retirement Plan Funding Dynamics:How Retirement Plan Variables Affect Funding Outcomes Jack Lawless, CPA, APMPension Strategies, LLC DFW FPA Platinum Sponsor

  2. Objectives • Identify the variables that play a roll in funding options when looking at a Qualified Retirement Plan. • Explore how those different variables affect the available funding for both Defined Contribution and Defined Benefit Plans. • Look at strategies to optimize the future outcome by correctly managing the current variables.

  3. What are the Variables in Play? • Age of the participant. • Compensation: • Compensation by definition consists of the earned income paid to a participant in a given year. • Investment Return: • Asset accumulation results from plan contributions as well as investment return. • Participant Demographics - census management.

  4. Why is it important to pay attention to the variables? • It will help identify what type of plan best suits your client’s needs. • It can help better leverage plan benefits toward the business owner. • It will help defer some taxes and eliminate others.

  5. Variable One: AGE • Most commonly thought about variable when looking at the best retirement plan option available to meet future retirement income desired. • The effect of Age on a Defined Contribution plan: Maximum salary deferral is limited to $17,500 until age 50, and then a ‘catch-up’ contribution of $5,500 available (total of $23,000) age 50+. Profit Sharing contributions may be age weighted to favor older participants. • The effect of Age on a Defined Benefit Plan: Maximum contribution amounts and maximum lump sum amounts increase with age as the participant gets closer to retirement. Once a participant reaches age 65, the contribution limits and lump sum limits begin to decrease.

  6. A look at the AGE effect:

  7. Variable Two: Compensation • Current maximum compensation allowed: $260,000 • How compensation affects available funding in a Defined Contribution Plan: • Profit Sharing Contribution is based off of 25% of compensation, up to a total DC contribution allowed of $52,000. • Once Compensation is above $138,000, participant has reached maximum contribution limit of $52,000 (or $57,500 if over age 50), between the maximum deferral and profit sharing contributions. • How compensation affects available funding in a Defined Benefit Plan: • Defined Benefit Plans use current, high average, or final average compensation. • Defined Benefit compensation maximum when calculating a lump sum is $210,000 at retirement age 62.

  8. Variable Three: Return • Asset accumulation results from two sources: • Contributions made into the plan. • Rate of Return on investments. • In a Defined Contribution Plan, the rate of return on investments plays no part in the calculation of the contributions allowed. • High growth rate investments do better in a Defined Contribution Plan. • In a Defined Benefit Plan, these two sources work hand in hand: As the rate of return increases, the contribution requirements will decrease. Likewise, if there is a negative rate of return (loss), the contribution for the next year will increase, in order to make up a portion of the investment loss. • Very conservative investments work best in a Defined Benefit Plan.

  9. Variable FOUR: Company Demographics • There are different allocation methods available in Defined Contribution plans, which are chosen depending on age and salary history of the employees at a company. • Depending on company demographics, an employer may chose to have a cross-tested Defined Benefit Plan or go with a Cash Balance option. • Also, part-time (otherwise excludable) employees, may be used to help balance testing requirements in either a Defined Benefit or Defined Contribution plan.

  10. Rewards of a little investigative work:

  11. Let’s take a look…. Pension Strategies, LLC Mallory Young Senior Pension Consultant (214) 221-9800 Ext. 334 myoung@pensionstrategies.com www.pensionstrategies.com Request for proposal Retirement plan limits Sign up for Newsletter

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