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Retirement Planning: What is a Defined Benefit Plan and how it can Help You Save $100's of $1,000's - YouTube
Channel: Oak Harvest Financial Group
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did you know that there are retirement
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plans out there that can allow you to
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save hundreds of thousands of dollars
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you don't have to be limited to just
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your 401k maximum contribution so if
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you're an independent contractor a sole
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proprietor or a small business owner
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this video can help you understand how
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to potentially save hundreds of
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thousands of dollars pre-tax into your
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retirement account
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[Music]
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hi i'm troy sharp ceo of oak harvest
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financial group certified tax specialist
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certified financial planner professional
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and host to the retirement income show
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okay we're going to talk about defined
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benefit plans most of you are familiar
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with what is known as a defined
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contribution plan that's your 401k your
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403b your sep your simple those are
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plans where you can make a defined
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contribution into and there are annual
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limits the defined benefit plan is
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the old pension plans essentially so
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here in houston we have a lot of clients
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that work for the oil and gas
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oil and gas companies engineers etc
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oftentimes when they retire they not
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only have their 401k a defined
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contribution plan but they also have a
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pension or a lump sum that they can roll
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over into an ira that is a defined
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benefit plan now it's important to
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understand the difference i'm not going
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to get into too much detail here my goal
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is to educate you that these plans exist
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oftentimes we'll set them up for
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physicians we'll set them up for real
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estate agents that are able to 1099 with
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the brokerage firm
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maybe you're a small business owner
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typically these are going to work better
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when you don't have a massive amount of
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employees because you have to fund their
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plans as well although granted there are
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age
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restrictions there are funding
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requirements too complex for me to get
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into everything here but i want you to
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know that if you are in one of these
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categories that i'm talking about this
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could very much apply to your situation
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so define benefit plans essentially
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instead of having a defined contribution
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that we can put into it the irs creates
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a formula that says we have to fund it
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to to achieve some type of defined
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benefit in the future these are going to
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typically be based on your age your
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income and also your years of service at
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the company i want to look at a couple
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examples here and let you know that
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if you're in one of these categories
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this is something you could definitely
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look into more and we help people set
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these plans up all the time if you want
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to reach out to us great if you want to
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reach out to your advisor or go online
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do some shopping figure it out i just
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want you to be aware that these
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strategies are 100 above board they've
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been around for forever in this country
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although we've shifted from the defined
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benefit plan model to the defined
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contribution plan model which is going
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from pensions the way it used to be for
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your parents and grandparents to 401ks
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this example we're going to look at a 52
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year old small business owner and see
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how much in this example they're making
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500 000 a year how much they can put
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into their defined benefit plan we're
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also going to look at though a 401k and
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a profit sharing contribution that can
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increase all of those benefits
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so
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tim sample just a sample person we've
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made up here 500 000 of compensation if
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you want to know what your compensation
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is to qualify for this because there are
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funding
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limitations based on you want to look at
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your schedule c income on your tax
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return
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so if you're self-employed a sole
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proprietor that's where you're going to
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get this number if you are an llc or a
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small business owner it's going to be a
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little bit different location on the tax
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return
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but
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500 000 of compensation
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birth date 1-1 1969 so 52 years old as
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we're recording this video the estimated
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defined benefit contribution that they
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can make is 216 000 so that's 216 to put
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in the defined benefit plan a 100
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deduction of that amount this tax year
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at an estimated 37 percent tax rate
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that's a savings tax savings today of 79
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957
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if this person was 57 or 59 or 62 they
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would be able to put a larger amount
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into the defined benefit plan because
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the defined benefit again we are funding
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it today to achieve some type of defined
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benefit in the future so when you're
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older you have a lesser horizon to
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achieve that funding level
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or yeah funding amount not only that
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your life expectancy is also less as
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well when you're older so the way the
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formulas work the older you are the more
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income you make the longer you've been
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at your company essentially the larger
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amount you can contribute
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now if this person wanted to to also do
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a 401k deferral because you can have a
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defined benefit plan and a 401 k
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216 is a defined benefit you could put a
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maximum 26 000 inside the 401 k plus a
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with an employer 6 contribution you
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could get up to
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000 you can 257.000
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today get into retirement accounts for
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an estimated first year tax savings of
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95 164. so these plans are not just for
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a one-time deduction okay we need to be
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working we need to plan on making
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contributions into this plan over time
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there's an actuary that needs to be
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involved as far as calculating how much
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you can put in what is the funding level
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of the plan you don't want to be over
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funded you don't want it to be
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underfunded these are complex retirement
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plan structures that the irs is going to
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scrutinize to make sure that you do not
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over or under fund it and get into a
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situation where you're essentially
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trying to violate the tax code it
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doesn't mean they're
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illegal it doesn't mean anything like
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that they're not even really as far as
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i'm aware high on the irs's list for
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potential schemes it's not like a
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captive insurance company it's not like
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having offshore
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companies or having a puerto rican
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entity
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those things are much more much more on
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the irs's radar this has been around for
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for
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50 60 70 80 years in this country this
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is nothing new
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some people do of course take advantage
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of them but
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understand if you do it right you work
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with a professional
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there's a third party company that does
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these we help clients set them up we'll
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manage the money inside them help with
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build a retirement plan and a tax
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strategy but we still need a third party
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firm that are experts in these plans to
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make sure they're utilized correctly you
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have to file forms every single year
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5500 you have to have a valuation
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they're not that expensive even though
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i'm making them sound like there's a lot
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to do there it's just a very specialized
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part of the tax code and there are
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companies that specialize this and we
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want to hire specialists to help us
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achieve our goals
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okay comparatively speaking
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this particular person they could do a
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simple ira or a sep ira or they could
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have a 401k with a profit sharing plan
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these are probably better solutions if
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this is the maximum you want to save for
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retirement but if you're doing really
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well 400 500 600 700 000 a year profit
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or income
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this could be a way to really
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supercharge the amount of savings that
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you put into your plan reduce the taxes
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you paid today and get your wealth get
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yourself well on a path to a more secure
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retirement so in summary
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i want you to simply be aware that
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defined benefit plans exist they are a
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bit complex we need to hire third-party
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firms to help administer these types of
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plans file the appropriate forms
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annually do the actuarial evaluations
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but what they the calculate is we're
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putting money in today to fund some type
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of defined benefit in the future these
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differ from 401k plants in the sense
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that 401k plans are defined contribution
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plans where you can put in a defined
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contribution up to an annual limit based
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on your age so ton of tax savings
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potentially available but these are for
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independent contractors sole proprietors
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small business owners if you're a w-2
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employee of another
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entity you cannot simply set up your own
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defined benefit plan
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a lot of times these are physicians
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or doctors dentists
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real estate agents anyone who has their
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own small business or 1099s as an
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independent contractor this may be a
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very very viable solution for you so if
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you meet the qualifications that i've
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laid out here and this is intriguing to
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you and you'd like to learn more feel
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free to reach out to us give us a call
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let's talk about it see if this is
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suitable for you and we can point you in
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the right direction to a third party to
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help administer it while partnering with
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us and of course you can always reach
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out to your local financial advisor i
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would just make sure that they have a
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working knowledge of how these plans
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work because there is some ongoing work
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between you the advisor and the third
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party administer all right thanks for
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watching today's video i hope this was
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helpful for you comment down below
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subscribe to the channel and if you hit
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[Music]
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