Request for Assistance

[Guest jtdplan]

I am new to this forum, so please bear with me.

I am working with a 57 year-old male dentist who is married and has one 10 year old child. In the planning stage, we have determined he needs to be investing about $5,000 per month to attain his 10 year retirement goals. Presently we have contacted a pension actuary with respect to a defined benefit plan.

My question is: "Other than a defined benefit plan, what other building blocks shoud we be considering?"

[mwyatt]

Here are a couple:

What does he have for staff who would qualify for the plan? You can generally exclude part-time (i.e, under 1000 Hours per year) employees from the plan. The composition of eligilbe employees (if any) makes a big difference as to what type of plan you will want to pursue.

How stable is your client's income? Generally medical/dental practices are ideal candidates for DB plans due to fairly predictable cash flow.

With a 57 year old principal, you should easily be able to generate much larger contributions than possible under a DC plan (probably by a factor of 2 or 3). It all boils down to what your staff costs are before proceeding (i.e., great if you can get your dentist a huge contribution, not so great if costs for the staff put him in a position of being better off just investing after-tax money for his retirement - this applies either to DC or DB structure).

[Guest jtdplan]

Thank you for the response and I agree with your thoughts.

Let me clarify, I have a pension company working up a defined benefit proposal. If the dentist opts not to go the defined benefit route, what other building blocks should I be considering?

Looking forward to your thoughts.

John

[mwyatt]

Well, you didn't really specify staff (if any) of client, but you did state that he needs to be putting away around $60k per year as an investment for himself. This could easily be accomplished by a DB plan (probably could at least double that amount in fact). A DC plan is only going to get you to $40k 415 maximum. Suppose you could bring in spouse and get her a contribution to total $60k, but I would think that new FICA taxes on her salary would tend to argue against that approach.

Given your target of $60k, a DB is the only qualified plan structure that is going to get this for your client.

[mbozek]

Q1- what is the covered comp for the Drs. business? The max deduction for the employer is the greater of 25% of covered comp (exclusive of employee 401(k) contributions) or the amount necessary to meet the minimum funding requirments of the IRC.

2. Is this plan going to be adopted by 12/31? If not the employee can establish a SEP or PS plan and contribute up to 25% of covered comp for 2002 plus the $1000 catch up contribution. The SEP does not have to be adopted by 12/31/02.

3. If there are no other ee than the spouse, the Dr. can establish a 401(k) plan and contribute up 11k plus contribution to the plans in 1 or 2(or make the $1k catchup to the 401K) plan) . But the total contribution to all DC plans for the Dr. is limited to 41k.

[Guest jtdplan]

Please define "covered" compensation.

The Dr is looking to begin this in 2003.

He does have $30,000 "idle" cash that needs to be invested.

Are you saying that he can fund a SEP for this year only?

Thnaks for your assistance,

John

[mwyatt]

Please: does your doctor have other employees? This is very important (and their ages matter) before anyone on this board can give you any guidance...

[mbozek]

covered comp is the sum of all compensation paid to all employees who participate in the plan not in excess of the 401(a)(17) limits. If the Dr is the only participant then covered comp is 200k but max deduction is limited to 40k because that is his max contribution. If Dr has a sec or assistant who has a salary of 50 k then covered comp is 250K and deduction is 62.5k if Dr is incorporated.

Yes- SEP can be established for only one year. However all employees with service for three years in last 5 years must be eligible to participate on a non discriminatory basis. SEE IRS pub 590 for sep rules. Also cash is fungible- as long as doc has comp from services he can use spare cash as contribution for plan. SEP can be established as late as date of filing of tax return for employer with extensions.