Episode F focuses on flexibility with timing and amounts of contributions. Can you put in a lot in one year, and nothing the next? Can you pay monthly, or quarterly? Does all the money have to go in by year end? What if you can't make the payments? We break it down for you, to give you the gist without being overwhelmed.
Episode F focuses on flexibility with timing and amounts of contributions. Can you put in a lot in one year, and nothing the next? Can you pay monthly, or quarterly? Does all the money have to go in by year end? What if you can't make the payments? We break it down for you, to give you the gist without being overwhelmed.
This episode focuses on the letter F: flexibility in the qualified retirement plans when it comes to how often, and how much, you have to put in.
Episode F - Flexibility When we say flexibility, what do we mean by that? It could mean a few things – it could mean the ability to put in a lot one year, and nothing the next. It could also mean the ability to pay monthly, or quarterly. It could also mean the ability to pay in the following year – can you even do that? What if you think you can put in a certain amt, and in a few years you need to change it? Let’s talk it through.
· I’m going to talk in general – there are so many nuances, and exceptions, that it would take a 24 hour podcast for all the disclaimers, and nobody wants to listen to that! So some statements may sound absolute – there’s probably 1 or 2 instances when it’s NOT the case, but my comments will be accurate in general.
· FUN FACT: There’s a contortion world record in the Guinness Book of World Records for the most full body revolutions while maintaining a chest stand in 1 minute. I saw the video – it’s pretty amazing.
· That’s not the kind of flex we’re talking about. First off, let’s talk about flexibility with amounts. For the 7 plans that are out there, how flexible are they? Can you put in $1M one year, and nothing the next? The answer to that is likely no. 3 of the plans – the defined contribution plans – are very flexible in this way. These are the SEPs, Profit sharings, and 401(k) profit sharings. For any of these, the amount contributed every year is very flexible – an owner can contribute up to 25% of total payroll in one year, and $0 the next. Maybe 15% the next, maybe 5% the next …. You get the idea. These 3 plans are great for businesses that have really volatile revenue, and can’t commit to making a set payment every year, but want to be able to contribute pre-tax to a qualified plan. For another 2 plans – traditional defined benefit plans and cash balance plans – there’s limited flexibility with contributions. This means that, although you’re required to put in an amt every year, there’s a range – and you can contribute anywhere in the range. For example – maybe you believe your business can commit to 100k per year. When we provide you with the annual results, you would see a range of maybe 80-120k that you can contribute. Yes, required to put in at least 80 – but in a good year, you can put in more, and in a bad year, you can put in less. These plans let you put in more dollar-wise, but give you less flexibility – you can’t go to zero in year 2, for example. SIMPLEs and fully insured plans (412i, or 412e3) don’t’ give any flexibility for the business owner. SIMPLEs have required contributions for the ees – either a fixed amount, or a set match on what the ee puts in. and a fully insured plan has one contribution amount – fixed. That’s it. No flexibility. So, is there flex? Absolutely, depending on the plan. And, can have 1 of each – know you can put in 100k, but in good years can put in 150. Then do a cash balance w a 401k profit sharing – best of both worlds.
· 2nd way a plan can be flex – when contribs are paid. Talk about a CY plan – plan year starts January 1. Contribs for a plan year any time jan 1 through tax filing date w extensions, as late as 9/15 the following year. Pay monthy? Sure. Quarterly? Sure. Wait til last min? Sure – 9/14 next year, as long as extension. Offers lots of flexibility for timing, good for cyclical businesses where CF goes up and down at particular times of year. Talking about ER contributions here – not 401(k). Remember – 401ks are EE contribs, even if made by the owner. Generally need to be made by end of CY, 401(k) comes off w2s issued in jan the following year, so need to be made in the CY. A few exceptions to this for owners that don’t have w2s, but this is the gen rule.
· FUN FACT – can’t help it, it’s got to be about another world record…there’s actually a record for how many times you can kick yourself in the head for 1 minute. A student in Katmandu claimed the record by kicking himself 134 times.
· Flex down the road - One thing often heard is that a plan ‘blew up’, set up, then owner couldn’t afford it. Locked them into a payment, and a few years later, due to investments, or pay, or something, plan cost too much – advisor took off, plan terminated, now pension plans are worse than rotten eggs. My response to this – you must not have been working with me! First off, make sure you the owner on board, CPA is on board, comfy with amounts and investments from the get-go. Second, more important, can change the plan down the road if you want to put in more or less. Cant change benefits already accrued – but def change going forward. Ex – Im’ owner, 100k for myself every year. 3 years down the road, I have 300k with interest. What if biz taken off, want to put in more? Ok, as long as I’m not hitting any IRS limits – change the plan provs to put in more. What if something goes wrong, can’t do 100k any more, but could do 50k? Again, amend plan for 50k going forward. Can’t take away the 300k w int, but can update going forward. So there’s flex with overall bens too – can’t change each year, but every few years? Absolutely.
· FINAL FUN FACT: end it up with the most flexible person in the world. A man named Daniel Browning Smith, aka the Rubberboy, holds 7 Guinness world records and is considered the most flexible person in history. He can turn his torso 180 degrees, and dislocate both arms and legs. Yikes.
· Wrapping it all up – a qualified ret plan can be as flex, or not, as you want. The more you want to contribute, the less flexible they are. But, can always have one of each – one with a higher contrib for more deductions that has less flex, plus one with a lower contrib but the ability to put in zero if it’s an off year. That’s where we can help – designing the right plan for you the biz owner, and lining it up with your goals and objectives. .
· Have any questions? Shoot me an email at MRS@gmail.com. Thanks for listening in – and have a great rest of your day.