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Beyend 401 small buisness owners - Jean D.

Jean.D Beyend 401 small buisness owners - Wiley & sons , 2004. - 274 p.
ISBN 0-471-27268
Download (direct link): beyond401korsmallbusinessowners2004.pdf
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In addition, if Sam dies, the corporation, as agreed, will pay his beneficiaries $100,000 per year for 10 years. When the corporation pays this deferred compensation to Jim’s beneficiaries, it will be able to deduct those expenses.
A potential problem with this plan is that the deferred compensation is considered an asset of the corporation. In a bankruptcy, the reserve in the cash value of the policy could go to creditors. Even a “Rabbi Trust,” as it is known to financial planners, does not protect against bankruptcy, although it does provide some limited creditor protection.
Executive Bonus Plan
Companies use executive bonus plans to reward key employees. Bonuses that are paid in cash to an employee are deductible to the corporation and are currently taxable to the
individual. Colleen’s company opted for an alternative plan. It used her bonus money to purchase a permanent life insurance policy for her. The unique characteristics of the insurance policy are that it can grow tax-free and come out tax-free. If Colleen withdraws the money properly, she can receive it tax-free as well. This bonus plan, with insurance funding, also provides a death benefit to Colleen’s beneficiaries. Executive bonus plans work well in both small and large companies.
As these case studies show, many choices are available for business owners who want to reduce taxes and save for retirement. Planners tend to make four common mistakes that can easily be avoided.
Only Looking at a Few Choices
Frequently, business owners do not see the full spectrum of choices. A financial advisor may jump to a conclusion and recommend a plan without presenting the full range of possibilities. Ask to see alternative plans and decide for yourself whether they make sense for your company.
Sticking Too Long with One Plan
You need to review plans on a regular basis, at least every couple of years, to ensure that they are still a good fit for your objectives. The plan may need to be updated, amended, or redesigned to reflect changes in the employee census, changes in the law, or even changes in business conditions or goals.
132 Case Studies That Illustrate Alternatives
Thinking a 401(k) Plan Will Fund Your Retirement
The 401(k) plans help the rank and file, but do not allow business owners to shelter enough money to fund a comfortable retirement. As a successful business owner, you need to think beyond 401(k)s.
Excluding Defined Benefit Plans
The defined benefit plans intimidate many business owners because of the perceived “lock-in” to a large annual funding commitment. Defined benefit plans can be a good fit for situations in which the business owner is over 50 and has few highly paid employees.
Wherever you are in your business development, there is a retirement plan that fits your circumstances. The more successful you are, the more important it is to take advantage of the sophisticated plan alternatives that save taxes and enable you to put money away for a comfortable retirement.
To realistically assess your alternatives, you need to receive proposals tailored to your situation. The proposals should show the costs and benefits of the different options. Drawing from the information presented in the previous chapters, you can pull together a request for proposal (RFP) and submit it to pension consultants and financial advisors. By requesting several proposals, you ensure that you will receive a broad range of options.
Seek recommendations from pension consultants, Certified Financial Planners, and financial advisors affiliated with financial institutions. Make certain that you understand whether they are independent or affiliated with a financial institution or insurance company.
Make a preliminary contact by telephone and confirm that they are interested in talking with you. Then send a letter confirming that you are seeking their advice and recommendations for a retirement plan for yourself and your company. If you already have a retirement plan, indicate that you want them to review it and advise you. Be certain to find out what fees, if any, are involved in this review process. Your request should include basic information about your company, including your employees’ ages and length of service, your age and expected
Requesting Proposals
retirement date, and how much you feel you can commit to funding a plan. Highlighting your key goals is also helpful:
• Reduce taxes currently
• Maximize contributions for principals
• Minimize administrative cost
• Fund retirement of owners in___________(how many) years
Figure 9.1 shows an example of a request for proposal.
Dear Pension Consultant,
This letter is intended to follow up on our conversation concerning the retirement plan for Company X. As we discussed, we currently have a 401(k) plan in place, but the participation rate by our employees has been low so we are interested in re-evaluating our alternatives.
The following table summarizes our current employee situation:
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