In this episode of Anderson Business Advisors, Toby Mathis speaks with Jeff Mason and Chris Hammond about cash balance pension plans for business owners. This is not a 401(k), it’s not an IRA, it’s a way to defer and even reduce a portion of the taxes you might need to pay and set yourself up with an annual income when you retire – if you are a business owner.
This is for all business entities. True pass-throughs, S Corps, sole proprietorships, and partnerships work best in this savings scenario. Many people that have even heard of defined benefit plans, or cash balance plans, might think you can’t start contributing until later in life, and that used to be true, but now people like Chris and Jeff are designing plans for people in their 30s.
Jeff and Chris will go over what the benefits, timelines, and rules are regarding these plans, give you some sample scenarios with actual clients they have helped, and also answer some specific questions that Toby has about their validity, value and future potential for participants.
Highlights/Topics:
- The basics – How business owners can set up an income for themselves at retirement, the requirements to contribute, how much you can put in, how much you can take out and the tax implications
- Some examples of Jeff’s clients and the actual numbers they are working with
- Deadlines and potential increases in contribution limits from the IRS
- Are Jeff and Chris going to try to “sell you” stuff if you go to them for help? No- the retirement community is very small, everyone would know if you were operating in an unethical way. We want more referrals, not less, so everything is highly ethical and we don’t take advantage of people
- Get in touch with Jeff and Chris – there’s no cost for your initial consultation and even developing a sample plan – they just want to see if their services can help you!
Resources:
Call Jeff Mason 815-516-0560
Full Episode Transcript:
Toby: Hey, guys. This is Toby Mathis with the Anderson Business Advisors podcast. Today, we’re going to be talking about putting in over $100,000 a year into a retirement plan. If you didn’t know you could, you’ll learn about the specifics today. I’m going to be joined by Jeff Mason. First off, welcome, Jeff.
Jeff: Thank you, Toby. A pleasure to be here.
Toby: And Chris Hammond.
Chris: Toby, how are you?
Toby: Ain’t that right. Hammond, right?
Chris: Yes.
Toby: All right, perfect. Both of you guys are specialists in this little known area. I say little known because most people don’t realize that you actually have retirement plans where you can literally jam them full of a ton of cash on an annual basis. But in your world, you’re probably used to just talking to people that know this stuff all day long.
Could you tell people when you guys get to volunteer as to what type of plan we’re talking about, and what allows you to put away tax-deferred in an annual amount? What are the parameters? Who wants to take that question?
Jeff: We’re talking about cash balance pension plans. The typical business owners for retirement plans are going to have a tax liability of $75,000 or more, and maybe have a desired amount to put in about $100,000 or more into the plan. But typically, we take a holistic tax approach to cash balance plans. We’re looking at what is their tax liability and what is their cash flow?
We design based on those needs to start off. A cash balance plan is one of the only year-after-year biggest deductions for the CPA. It can really hit home on an annual basis. The CPA will have a real nice deduction every year that they can set up for their client.
Toby: Is this something just anybody can do, or do you have to have a business?
Jeff: You do have to be a business owner. All business entities work. Pass-through entities are most favorable. C-corps work, but the use of the tax liability is wrapped up. It’s sitting there within there and it might be closer to taking a dividend. True pass-throughs, S, sole prop, partnerships work the best.
Toby: Let’s break this down a little bit. I know you are an expert in this area, but I want to do what we call K through 12 again a little bit. If I’m a business owner, and I’m making good money, and I go to my account, my account might say, hey, you could do a 401(k), sometimes they’re saying people can do an IRA, you got this Roth IRA and all these things, this is not that.
This is something where you’re reverse engineering it. You’re actually determining an amount that’s going to be available upon retirement. It means that if I’m a high-income person, in order for me to continue to receive—let’s say I’m making $150,000–$200,000 a year—that when I retire, I’m going to need to have a pot of money put aside, right?
Chris: That’s exactly right. If you work it backwards from retirement, that’s really how we get down to the nuts and bolts of what’s under the hood. A lot of the stuff, people, their eyes glaze over when we started talking about it. It’s perfectly understandable, but that’s the difference.
In the 401(k) plan, you’re just putting in contributions, and what can the market do for me? To define a benefit cash balance plan, you really want to establish a nest egg at retirement to fund you an income for the rest of your life, basically. Our designs combine the two, particularly when there are employees involved for a number of reasons that we’d have to dive into to explain.
Like Jeff said, it’s typically for small business owners that are highly profitable and consistent year-to-year. Any type of business, but we’re also talking about high income earners, professional practice, doctors, lawyers, dentists, chiropractors. Anyone who you’re looking at their tax return and you’re going, boy, we have quite a bit of tax exposure here.
Like Jeff said, on the low end, $75,000 of tax exposure to six figures, but we have a lot of clients that are putting in per owner $200,000, $300,000, $400,000, $500,000 a year. It really just depends on where they are at relative to that retirement age, what’s the remaining time to that, and then also, what level of compensation are they taking per year? All those factors determine how much they can put in.
What’s interesting is that, right now, if you were sitting, Toby, at that retirement age, you could have a nest egg of up to $3,150,000 at the maximum and take that out if you were at retirement age right now. Jeff will talk about this a little bit, but limits are going up extraordinarily high after 2021 due to Covid and due to inflation this year. That’s going to expand that ceiling quite a bit as well.
Toby: That means that you could put $3 million in this plan. What if you only have 7–8 years till retirement?
Chris: Then it becomes more difficult because you’re looking at the budget and that time horizon in which you can budget how much you can put in. It is dependent also on the number of years you’re in the plan, and again, what your average compensation level is. Really high income earners, it’s not that difficult. If you have a moderate level of income, then we’re talking $75,000 to six figures.
Toby: What’s moderate in you guys’ book?
Chris: $150,000. If somebody’s making $150,000 W-2, pretty moderate. We have a lot of clients, doctors in sites that are in the $300,000-900,000 a year. We have small business owners that are netting more than a million a year. It all comes down to the numbers. The longer your time horizon, the more you can put away.
Toby that’s also the difference between this type of pension plan and a 401(k) in that it’s actuarially determined. The closer you are to that retirement age, the more you can put in on an annual basis.
Toby: So you could end up putting, in theory—correct me if I’m wrong—$300,000, $400,000, or $500,000 a year, tax-deferred?
Chris: Again, it depends on the circumstances. There’s an equilibrium point that the more time you have left, the more easily that’s attainable, because also, you run up against what’s called the 415 limit that the IRS limits how much you can take out. You can’t get in in the last year and say I’m going to dump in $500,000. You might only be able to pull half of that out without being taxed excessively by the IRS.
Toby: I know what the actuarial stuff is. It just means the people that are licensed with the IRS to do these assumptions.
Chris: Absolutely. We own the actuarial firms and we have actuaries that work for us.
Toby: What’s the maximum out right now that I could pull out of a plan on an annual basis? When I design this thing, what is my income stream when I retire? What’s the most amount?
Chris: Jeff, do you want to go into those current limits and then what’s coming?
Jeff: Yeah. The current limits as of 2022, each year you can pull out up to $245,000 as your annual benefit.
Toby: That’s a big chunk of money. I have to have a big nest egg. This is not a 401(k) where I’m putting in $20,000 a year or, maybe on the high end I’m getting in there $60,000–$62,000. Maybe I’m getting to make up, I’m getting $68,500 or something. I would have to have a very large amount sitting in that plan to pay that type of benefit, wouldn’t I?
Chris: For the rest of your life, exactly.
Jeff: The exciting news is that what forecasted from our actuarial society—they’re in the know what the next year’s cost of living adjustments are for benefits—they’re saying it’s going to move all the way up to $265,000 a year.
Toby: So that you can be pulling out of your retirement plan. Again, I like to repeat things over and over again. You put these plans together and we’re defining, really, the benefit of it. When you’re defining the contribution, it’s called a defined contribution plan.
Hey, 401(k), you can put in X number of dollars a year. It’s capped, right? For young people, it might be $62,000. On these plans, there really isn’t a cap on the annual amount, it’s more on the benefit that you can receive. We’re defining the benefit. Is that an accurate statement?
Chris: Correct.
Jeff: There’s one little caveat. There is a limit within the year, but we can move past that as long as we’re not going to eclipse what Chris was talking about the IRS 415 limit. We can move ahead.
I like to use a couple of analogies when explaining when you’re actually setting up a benefit for the business owner or any participant in a plan. Think of this as a savings account. Like you said, we’re defining the amount that we’re putting in.
Go to the bank, open a savings account, and you say, well, how much do I want to save? Let’s say it’s a million dollars. How long do I have to save that million dollars? Let’s say it’s 10 years. Each year, theoretically, we’re going to put in $100,000 each year for the next 10 years to hit our goal. The way the IRS administers these plans, it’s put a little interest in there. Let’s say we’re going to pay ourselves 3% interest on why we were doing this.
The way that we design our cash balance plans are if the business owner is doing really well and they have a larger tax liability than, let’s say, $100,000, maybe we push them ahead and put in $300,000. Now we’re ahead and they’re ahead of their savings goal.
Let’s say now that we’re having a bad year, we’re having a down year, we’re stuck with an administration that doesn’t want to do anything, and we don’t have $100,000. Maybe we only put in $50,000. We’re a little bit behind, but we still have time to catch up.
Toby: So you have some flexibility in that?
Jeff: I had to bet on both sides when we’re designing this. I’m always going to protect the business owner. I’m going to say, okay, what a stable year looks like for you. If they’ve been repeated over a number of years, let’s design the formula where the minimum is going to be as low as we possibly can get to achieve our goal, but we have on the maximum deductibility the IRS will allow, now we have some room to play if we have a really big year.
Toby: That sounds really, really powerful. To make it more concrete for folks—because we can talk all the theory all day long—do you have any examples of people that you’ve done plans for just to give us an idea of the numbers and what it looks like?
Jeff: Certainly. The first one that I called up. Between our two companies, we’ve designed well over 1800 cash balance plans. We currently administer right around 300 plans. I’ve been in business for 20 years. I’ve seen it and seen all kinds of different scenarios, but I have one that really knocked it out of the park.
It was a group of IT guys. It was three business owners, and they were all doing really well. They were paying themselves $350,000 apiece, and they had K-1s of $600,000 or $700,000 apiece.
Toby: So they’re making a million dollars a year each?
Jeff: Oh, yeah, well over a million dollars. They’re doing really well. They have a staff of five. Only one was an HC, so he’s making $150,000. After I was done with all the benefit design, the business owners ended up getting 96% of the benefit.
Toby: I’m going to stop right there. I don’t know the amount that we put in yet. A lot of folks stop and they don’t even look at defined benefit plans, because if they have employees, they are under the mistaken belief that they’re going to have to give all this money to their employees, when in all actuality, you have the ability to design benefits. Just like you said, Jeff, 96% going to the owners, which yeah, you’re giving money to your employees. Not a bad thing.
Jeff: Yup.
Chris: Which is a tax deduction.
Toby: Yeah, tax deduction and it’s benefiting them. Nowadays, you better be thinking about how to retain them, but the vast majority of the benefit is going right to the top, if I’m not mistaken. That passes the discrimination test, too, right?
Jeff: Yup, everything we do. When we do initial designs, we actually test the design. Even if we get a case, a proposal, sometimes they don’t give me a goal in mind. I take a look at the information that I’m provided, then I take a shot in the dark. I take my 20+ years of experience designing these.
Right when we get on the phone with the client and start to present this, I say, this is just numbers on a page, but the numbers on this page just happen to be tested, and they pass. We can work backwards or forward. All that 96%, $867,000 went to the business owners, and then another $35,000 only went to the employees.
Toby: You had an annual deduction. It sounds like you got an annual deduction of about $900,000.
Jeff: $901,774.
Toby: And annual basis, you could put close to a million dollars a year away tax-deferred. The tax write off on that—I don’t know what state they’re in—you’re looking at federal tax, at least, of 37%.
Jeff: That’s the Fed alone. This plan is sold in 2021. They’re just on the Fed at 37%. They save $310,000. Most business owners are like, well, I’m deferring this, so I still have to pay for it.
What I tell them is, when you write that $310,000 check, it will go to the IRS. What is your rate of return on that? It’s zero. You never get anything back from the IRS. At least in this case, when you put in the $900,000, 96% is in your account and in your name.
Toby: Yup, what do you do with that money? What usually happens to it? Does it get managed? Do you go out and buy gold with it? What do you do with it?
Jeff: It is typically managed. If we’re to go back to our savings account analogy, because we are looking to achieve goals, it is going to be in very conservative investments, because we know what the goal is and what we want to hit. The rate of return is in the deduction. We already have 25%–30% already built in. We don’t have to chase the market.
I always tell clients and the CPA, this is your safe bucket. This is the bucket of money that you’re building, your nest egg, because we’re all business owners on this call right now. The happiest day was when we started the business, hopefully, the happiest day is when we sell the business, but that part isn’t guaranteed. You have to build something for the blood, sweat, and tears that we put into our business. This is only to make a catch up plan to do so.
Toby: So you have this big pot of money, you’ll take it out, be taxable when you take it out when you retire, but you’re taking out over a period of years. Hopefully, you’re in a much lower tax bracket. Do you remember how much they were getting as a benefit when they retired on that plan that you just went over?
Jeff: Two of the owners were in their late 40s. They were going to achieve the $3.1 million if they stay on this track. The third owner, he was 58, and he was going to hit right around $2.8–$2.7 million.
Toby: When you take it out then, that means they’re probably getting right around somewhere between $200,000 and $250,000 a year?
Chris: Let me let me say it this way, Toby. This is what’s fascinating about these types of plans. This is all under the traditional defined benefit umbrella, but it’s a cash balance plan. When you’re looking at it, it’s as if you’re looking at a 401(k) account.
While there is a built-in annuity and an annuity option when someone terminates employment and takes their payout, or if one of the owners decides to sell and go off and do something else, or if they all make it to the exit at the end and retire, 99.99% of all distributions are lump sums. And they get to decide what to do with it. In most cases, they’re going to roll it over into an IRA.
We’re going to work with partners like you and other tax partners that we have to do effective tax planning to get them into the lower marginal rates on the back-end with a distribution strategy.
In the end, looking at hundreds of thousands of years in an equivalent annuity, if you will. The good thing is you don’t have to do an annuity and most people don’t, but you have the control of the money and your advisors.
Toby: We all remember the old days and we heard our grandparents talking about getting a—
Chris: Absolutely, get a monthly pension check.
Toby: Yeah, and this is a little different in that we’re actually putting a funded amount. If you want to go get an annuity, you certainly can. If you want to throw it into your 401(k) and buy real estate, you can. If you want to roll in your 401(k) and trade stocks, you can. If you want to do a combination, you can.
I’m looking at it tax-wise. Let’s say like the gentlemen that you’re talking about, Jeff, the example, those three business owners. They just deducted $1 million out of the top bracket. If they just paid themselves out $200,000 a year for the rest of their lives, they’re in the 24% tax bracket. They save 13% no matter what. It’s just off the top.
Chris: Just off the top about anything.
Toby: Without doing anything else. If, hey, I’m going to have to pay tax on it in the future, just by spreading it out. It’s like an installment sale in real estate. I like that stuff.
Jeff: Within that, we do some of the advanced strategies in there. Part of the investment portfolio could be life insurance. So now, we’re two-thirds of the way to Roth within the account.
Another, cash balance pension plans are the only way that you can fund life insurance and a pre-tax. You’re getting pre-tax savings on the contributions that you’re putting into the life insurance, and then there’s an arbitrage to get that out. I think that’s more of an advanced topic, but it’s definitely a nice teaser for everyone.
Toby: That’s wild. If you pass away, who gets the benefit of the life insurance under those circumstances?
Jeff: You’ll name the retirement plan, the retirement plan is the beneficiary, and then the beneficiary or the participant will actually get the proceeds.
Chris: You actually have a built-in completion plan. That’s an ancillary benefit of this aside from the tax design.
Toby: That’s pretty wild.
Chris: It really is.
Toby: Now you just threw the monkey wrench. As soon as you start to talk about insurance and the plans, you better know your stuff. I’m always like, eh? It’s nice. Other than that, in corporate-owned life insurance so that you don’t have to pay tax when you’re buying the insurance. Even under a Coulier, the corporate-owned company has to.
Do you have another example, too? People resonate when they hear, hey, here’s somebody like me, here’s what they did, I want to do what they did. I like the three owners. What’s another one that you might have?
Jeff: I actually picked another one. He’s a sales guy. At first, I was going to pick a doctor because everyone knows doctors, but it resonates more sometimes when you got a salesperson that generates revenue in different ways. Sometimes, doctors, we all know doctors can be a little bit harder to work with in some way. But they are definitely ideal candidates because they always have tax liabilities.
Toby: We have a lot of doctors that listen to this, by the way.
Jeff: We love them. We have a lot of doctor clients as well.
Toby: Those are slam dunks, because you’re looking at it and going, hey, I’m getting killed in taxes. I’m making $750,000 a year. Help. You’re like, here’s a solution.
Jeff: We definitely have a lot of experience with the complexities of doctor groups. We have an anesthesiologist group that has 40 owners, and they’re in a partnership. We were able to have the individual doctors that wanted to do the cash balance plan. They only had four rank and file people, so we didn’t really have to worry about testing in that regard. We had to give them a benefit, but it wasn’t a huge hurdle.
We actually had the individual doctors set up an LLC as an S-corp. The partnership, now they can set up their own. They didn’t have to argue with their partners.
Toby: You almost never have the doctors owning it just as individual sole proprietors because that’s insanity. You’re getting killed with the self-employment tax. It never goes away. It just keeps hitting you. It phases out on part of it as the old age does.
Jeff: And they act as, each would kill. It’s hard for them to understand that. We understand something. We can have some understanding that if you have multiple partners, we may be able to figure that out for you.
Toby: Let’s do this example. You have the salesperson.
Jeff: I picked a salesperson. He’s young. Most people that actually have heard of defined benefit plans or cash balance plans usually think, oh, I can’t even start this until I’m 50. That used to be the way that it was. Then about seven or eight years ago, Chris and I and our actuary, we figured out a new way to design, a new way to attack it, and how we design our plans. Now we’re putting in cash balance plans for 35-year-olds, and it’s working.
Chris With six figures contributions.
Jeff: It’s not as huge as the previous.
Chris: Give the example, Jeff.
Jeff: The example is the salesperson. He’s 42. His wife is 36. For him, we put in $260,000 and $190,000 for his wife. He’s making $225,000. We worked with the CPA and worked out that sweet spot for payroll. We didn’t want to go all the way to the limits because he was trying to get to QBI and some other.
Toby: Is he putting in 100% of his take home pay, then?
Jeff: He’s putting in more than 100% of his take home pay.
Toby: Is the company making the contribution, or is he deferring his own compensation? Is he getting a paycheck putting this in?
Jeff: Yeah. He had a really big year. In his design, he had a tremendous year. He hit his once every seven-year anomaly, where he had a year that was just monstrous for him. We set up this design where in this first year, between the cash balance plan and the 401(k), he was able to put in a total of $489,000.
Toby: I just want people to let that sink in for a second. He made a salary of around $200,000?
Jeff: $225,000.
Toby: And what did his wife make as a salary?
Jeff: $100,000.
Toby: So $325,000 total salary they took, but they put in how much?
Jeff: $489,000.
Toby: Almost $500,000.
Chris: The good part about that is that that’s not an annual commitment. In that case, it was just an upfront. The annual will be lower, but it all depends on, again, the level and consistency of profitability year to year of the owner or owners, their tax exposure, and their cash flow. We basically take all those elements and we figure out, like Jeff said, where that sweet spot is. We work with the CPAs to determine that.
Jeff: Yup. His plan for next year is to put in right around $225,000–$250,000.
Toby: That’s incredible, guys.
Chris: We have a chiropractor that’s perfectly happy just putting in $100,000 every year or $100,000 every year is the budget. But like Jeff said, in this case, this guy had a big windfall or a big year, you can put it in more. If you have a year where cash flow is struggling, you can put in less.
We have a field goal window, basically. It’s all the variables that we can lever, can widen, or shrink that field goal range. The thing about these plans, Toby, is the incredible amount of latitude upfront during the lifecycle and on the back-end.
Toby: I’m looking at it going, if I’m married and I get above $628,000, I’m getting hammered. I’m already getting hammered even above $400,000. You’re in 35%, you get over $628,000. You’re 37%. Actually, I’m doing 2021 taxes right now.
Chris: And that’s just federal tax.
Toby: It’s a little bit higher for this year. But yeah, you got it, it’s just federal. Anything I can do to get out of those. What you’re saying is that you had somebody that definitely, all that money would have been at 37% plus state, and we just defer the whole chunk of it. Those people at an aggregate tax bracket are probably somewhere around 20%. Wow.
If somebody’s listening to this and they go, boy, that sounds neat, but it probably doesn’t apply to me. What’s your typical discussion with somebody? It’s like, here’s who should be paying attention to this. If you got a spiel, who would it be? Who would you be reaching out to?
Jeff: Like Chris cited earlier, any professional or any business owner that is making consistent profit each year or has a large tax liability.
Toby: What level? What are you really looking for? Are you saying, hey, somebody is making $200,000 a year, $300,000 a year, $500,000?
Chris: I would say this. On the low end of our range, if you have someone that’s already in a 401(k) plan, they’re doing profit sharing, they’re maxing out into the low 60s as the current limits for total, and that’s as much as they can do, but you ask them, has that eliminated your tax exposure or do you still have significant exposure?
If somebody needs to say at least double their 401(k), that would be the bottom rung of our range in case somebody wants to double their 401(k) amount. Because like you said, it depends on where you’re at in your life cycle and in your career. If you want to do five times that amount, 10 times that amount, you can.
Toby: But you could at least consistently, like your chiropractor, $100,000 a year. Hey, I want to put $100,000 a year, I have a career, I’m going to be working for 20 years. I want to make sure that I have a big chunk of cash sitting there that I can use when I retire.
Chris: That’s right. We have a wide range of clients all across that spectrum. Our sweet spot, Toby, our average is probably an owner that’s putting in between $150,000 and $250,000 a year in total is average, but also is year-to-year consulting on our part.
Jeff and I have a chiropractor, actually. He’s a chiropractor right now, his comp was around $117,000, and he was putting in $150,000 for this year under, $170,000, something like that. I talked to him because he was telling me about his business plans. I said, we’ve got these limit increases going up, you want to sock away a lot more, don’t you? He said, yes. He go, actually, I want to put in $270,00 this year. I go, it’s done. Let’s do that.
If you have the cash flow and if you really have that tax liability, we can increase your comp to these complements that are going up, $305,000 for 2022. We can increase, we can widen this field goal range, and you can put in much more if you want to, and he did.
He just called his payroll company yesterday, he just did a $305,000 for this year, and we hear it’s going up to $335,000 next year. What that means on an annual basis, that back-end annuity you’re talking about, it’s just going to keep getting much larger.
Toby: What I really liked is you have an option. You can go up and down.
Chris: That’s right.
Toby: When do you have to make that final decision? Are you able to still be doing this analysis for 2021, for example?
Chris: We’re pretty much done with 2021, because the funding deadline is coming up in two weeks.
Jeff: The funding deadline is 9/15. The other nice part is really, it’s going to be pretty hard to set up it, unless it’s like a one-man operation owner only type thing, you might be able to get a TDA account set up in 15 days, but then you still got to write a check and get all that set up.
Toby: Can you set this up after the year end?
Chris: Yes.
Jeff: Yes.
Toby: If somebody is sitting there and they’re watching this video, and we are in September when this comes out or probably the mid September, so they’re going oh, man, I missed 2021, and I just don’t know if I want to do anything in 2022, and they’re listening to it at the end of 2022 or early 2023, they could still do something for 2022.
Jeff: Absolutely.
Toby: Even after the year. I love that type of […].
Jeff: If you’re a normal pass-through entity, I guess every entity, you have only till 9/15 the following year. Obviously, we’re going to have to put stoppers. If you have employees, we need more time because there are IRS and DOL rules that we have to follow to get things set up.
Toby: You really want to have it for 2022 in place before the end of the year, but you can fund it all the way up until September of the following year.
Jeff: That’s right, and that’s definitely the best way to deal with it.
Chris: We can design it after the year end. Anyone who’s going to listen to this after mid September, they should be looking at, okay, what was my tax bill this year? They go, good God. You simply ask them, do you want to write that check again next year, or do you want to pay yourself?
Toby: It’s hitting the burner. It’s putting your hand on a burner. You only do it once? To deal like that? No. Okay, then here’s our solution.
I have a couple questions for you guys just to give the pointed side, because for some people, they’re going to be like, there’s no way, I heard my accountant, look at this and said, no way.
The reason they’re hearing no way could be because they don’t make enough money, they don’t have a history of making consistent annual W-2, or is it too many employees? Is that they’re too young? What are the reasons why somebody’s being told by their accountant that a defined benefit isn’t something they should look at?
Chris: Number one reason would be misunderstanding, lack of education. Yes, you’re correct. There are circumstances where it may not make sense. First and foremost, as Jeff and I always articulate, if the profitability is inconsistent, because while we have latitude every year into what you can fund—okay, we use the savings account analogy, we also use the credit card analogy.
You’re creating these benefits each year. Then based on your cash flow and tax liability, you have a range, like your minimum payment to the credit card, paying it off, or if you want a credit on your card. You have a range in which you can actually fund. But if we design this, and the situation upfront looks ideal, but then the next year or the year after that, they’re only able to fund the minimum each year, which is what’s required by law, so that’s fine, but now you know that it’s too rich for them.
Again, though, what’s great about these things is Jeff and I have the ability to modify these plans as we go. We don’t make changes year to year. We can’t do that. But when we find somebody either, it’s too rich for me, I can’t find, I don’t have the cash flow to support it, or they get to a point where, hey, I need to sock a lot more weight, we can redesign and enhance that benefit, enrich that benefit. So much latitude.
Toby: I’m thinking, there’s got to be a minimum period of time that you want to run this. You don’t want to just set this up and do it for one year, obviously.
Chris: You don’t want to do that because that would open the red flags to the IRS. Honestly, though, if you’re a 58-year-old doctor, and you haven’t started putting anything away from retirement, and you’re going to retire at 62, that’s not a problem.
It is a retirement plan, so we like to say 7–10 years is our typical window target. You can certainly go longer, you can certainly go shorter, but that’s the typical window. If you open it up and dump it in a contribution for a year or two and then shut it down, that could raise flags. It doesn’t necessarily mean you’re in trouble, it just means it could raise flags.
Toby: IRS don’t have enough personnel right now in the exempt organizations, but they’re supposedly getting all these new agents. Maybe they started looking at them, I have no idea. Nobody has a crystal ball. As of right now, they don’t really look at these. you have to bang them over the head to get them to really look at a plan.
Chris: Certainly, if business circumstances change unfavorably, the business has to shut down, that happened to several of our clients during Covid, that’s a legitimate reason, you’re only going to have to plan for a year or two, and you have to shut it down. That’s a legitimate reason.
Toby: If I got shut down, that’s a pretty obvious one. What about this? I’ll think of one client. The wife is a surgeon. She makes really good money. The husband does a side job, he’s running his own thing, mostly involved in real estate making $7500 a year.
Is that somebody who you might look at it and go, you’re making good money, but one spouse is just killing it. Can we use that as part of the calculation at all, or is it something where you would just look at the husband and see if maybe we could keep from piling on? Assuming that the wife in this case was making close to three quarters of a million dollars a year, and the last thing he wanted to do was pile on more income. Is that somebody that you may look at or no?
Chris: Again, it comes down to their tax exposure. Basically, Jeff takes each case individually and tailors it to that situation. What are their incomes? What is their cash flow like? What are they paying in taxes each year? And what is their objective?
When we mesh all that together, we come up with a unique solution on a case by case basis. There’s no cookie cutter. We have our ideal model, but it’s very, very lot of latitude.
Jeff: The way Anderson Advisors works and the way we work are in sync in that regard. Even though you’re a much larger firm in that regard, we both think of our clients in a boutique type setting, where we’re going to put that extra little touch that you won’t get with a cookie cutter operation. That’s why we take each one and never take all their variables in there, and that’s how I design.
Chris: Jeff and I run this completely solution-driven. We’re in the retirement plan industry, the TPA administer. We’re doing administration and keeping everybody in compliance, doing all the filings, but that’s 98% of the firms out there.
What we do above and beyond that is we work with the tax planning. We look at the distribution strategy on the back-end. What is the ultimate target? Where is your business right now? And what do we need to do to adjust as we go along the way? That’s what we’re here for. We’re consultants solution-driven.
Toby: What if somebody’s sitting out there, and we have a lot of financial planners and other folks that listen to this podcast and watch your videos. What about that individual that’s going, boy, this sounds great. But I just know. If I send somebody over to Chris and Jeff, they’re going to want to manage that money or they’re going to want to sell them a product. Do you guys do any of that? Do you guys actually manage money? Or do you work with the financial planners and say, hey, I’ll send you folks over. Don’t worry. That’s not what we’re doing?
Jeff: We do have our toes in the water in some of those areas. The retirement world is a very small world. If you do something like that, you steal someone’s client or take advantage in that regard, everyone’s going to know. We believe strongly in what we call coopetition. There’s plenty in the pie to work together.
There might be a scenario where we might want to institute some life insurance in there. I’m licensed in life insurance, and so is Chris. If we’re going to help design it, of course, maybe we want to take a small piece of that pie, but we’re not going to go, hey, we’re going to go sell them and IUL and all that. No, it’s not going to happen.
The same thing on the investment side. Chris is licensed on investment, but we’re not interested in chasing the investment. We want to provide a solution. If you trust us enough to send us your client, we actually want you to send us more than one client, so why would we take advantage in that?
Chris: And we partner with those people at the same time.
Toby: I was going to say that that was a trick question. There are a lot of people. They’re in another business, but they’re talking about this. Yes, let’s talk about cash balance, and then they have somebody that they know that knows somebody.
What they’re really trying to do is get your money under management and then they’re like, oh, yeah, we’ll do this too. It sounds like your guys’ business really is focusing in on crunching the numbers, actually administering the plan, and keeping it in compliance.
Chris: Exactly. It comes up with, what is the best solution for that client? We can offer what we have on our platform. But again, like Jeff said, we work together with all that clients’ advisors. Our first and foremost target is, how can we leverage this as the accumulation for retirement while getting the best tax deduction that’s optimally suited for that client?
Toby: I love it. All right. If somebody’s listening to this and they’re like, gosh, this might be right, who do they reach out to? What does it cost? If there is a cost. Who could they reach out to and say, hey, will you look at my company? Will you look at my situation and see if this is appropriate for me?
Jeff: I’m going to give my contact information to start out and then maybe at some point, we build a portal of some sort.
Toby: Keep it simple. Let them know you.
Jeff: My email is jmason@redwoodrs.com. The phone number is 815-516-0560.
Toby: Perfect. That’s all we need. That’s perfect. We’ll post that information, too. We want people to be able to get out and get the calculation.
We actually have three rules here, just so you guys know. I’ll see if you guys agree with them, because anything that’s tax or financially-related, we have just three. It’s really simple, calculate. The second rule is calculate. The third rule is calculate. You got to crunch in hours and see if it actually makes sense for you. We like that.
Chris: Exactly. We agree.
Toby: It’s three difficult rules, but nobody wants to abide by them. Actually, get those pencils out or computers nowadays, crunch the numbers, and see if it makes sense for you. They can reach out to you. Is there a cost to talk to them, just so we’re upfront?
Jeff: Yeah. For initial consulting and even to put together a design, I’ll request other information just like your CPA would do tax planning. There’s no cost upfront to do maybe one or two designs. If it gets a little out of hand, I want to do XYZ, and start getting in, like, I want to do 30 different scenarios and it’s like, hey, I’m going to charge you something. To discuss it, there’s no cost as of now. You can open up so many doors. I just have to tell you what’s going on.
Toby: No reason for them not to. That’s really nice, you have to do that. I still remember the days where everybody wanted a big old retainer to start doing it. They almost treated people like they were a nuisance.
Chris: Oh, absolutely. We just want to see what that client’s picture looks like and show them if we can help them or not.
Toby: Easy peasy, guys. Thank you both to Chris and Jeff for coming on. I really appreciate you sharing this. It’s powerful information. Again, I’ll post Jeff. Chris will ignore you on the posting of the information. We’ll make everybody go through Jeff. I know you guys work together.
We’ll post Jeff’s information so you guys can read straight out. Let them know that you heard it on the podcast so that they come back and continue to share information with us. We love it. Just thank you, gentlemen, for coming on.
Chris: You’re very welcome.
Jeff: Appreciate it.
