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Do you have any high-income clients who are age 45 or older and are either self-employed or the owner of a small business? If so, some of these clients may be looking for a way to increase their tax deductions for 2005 and beyond. Year-end presents an opportunity to contact self-employed individuals and small business owners about establishing a retirement plan. Many of these individuals may be particularly interested in hearing about the potential benefits of the Small Business Pension ProgramSM.
The Small Business Pension Program is a defined benefit retirement plan program designed specifically for older, high-income, self-employed individuals and owners of small businesses with one to five employees. For those who qualify, the tax deductible contribution can be as high as $100,000 or more each year. The business owner must establish this type of plan by the business' year-end (typically December 31) in order to claim a tax deduction for 2005.
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Clients with substantial side or secondary incomes may also be ideal candidates for the Small Business Pension Program if they don't need that income to maintain their lifestyle. Consider your clients who have:
- Side income, such as from consulting or board of director fees.
- Secondary income from a self-employed spouse.
Ask clients specific questions to see if their supplemental income makes them eligible to fund a defined benefit pension plan.
The Small Business Pension Program is an alternative to a SEP IRA or Profit Sharing Plan.
For clients who can commit to the required annual contribution, the Small Business Pension Program permits contributions significantly greater than SEP IRAs and other types of defined contribution plans such as profit sharing plans, allow. Defined contribution plans generally have a contribution limit of 25% of compensation up to $42,000 (for 2005). Defined Benefit plans can allow larger contributions based on the age and compensation of the participant. See the contribution comparison below:
Many affluent clients pay more in taxes than necessary. Assets that could be invested in retirement accounts are unnecessarily paid out in current income taxes. Who may want to consider a Small Business Pension Program?
- Individuals working for an employer with a company-sponsored retirement plan, but who also have side income.
- Affluent clients with self-employed spouses. Spouses who are corporate executives with a 401(k) plan may have spouses who are independent contractors, real estate agents, part-time self-employed attorneys, graphic artists or any of numerous other common self-employed occupations. If the couple can live on primary income alone, they may possibly contribute nearly all of the spouse's self-employment income (up to about $100,000-$200,000) to a defined benefit plan through this Program.
Professors with side income: Is there a university or college in your town? Every college posts bios of their faculty members on their Web sites. Check out the information about faculty in the professional schools — Business, Medical, Law, Engineering — which may tell you about any income-producing extra-curricular activities and list their contact information.
Boards of Directors: Most public corporations post the names of their independent directors on their Web sites. While this is side income for most of them, it can be as much as $200,000 a year or more if they hold positions on several boards.
Go to www.smallbizpension.com for more information
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Confused about limits to a defined benefit plan? Here's why — the law imposes the limit on the allowable benefit, not on the contribution. Click here to learn more.
Please Note: the mailing address to send the plan Set-Up Questionnaire and set up fee has changed. Please send mail to:
EMJAY Retirement Plan Services
Attn: Small Business Defined Benefit
5001 North Lydell Avenue
Milwaukee, WI 53217
Client Considerations
Review these considerations to determine if a Small Business Pension Program is suitable for your client:
- Defined benefit plans have mandatory annual contributions based on actuarial calculations and these plans are intended to be permanent. They should only be established by businesses with steady income which can commit to the plan for a minimum of three to five years.
- Plans that terminate early are at risk for IRS penalties and possible disqualification by the IRS.
- The plan's actuary assumes an investment return of 5.5% annually. Returns less than this amount will increase the future required contributions, while returns greater than this amount will decrease future allowable contributions.
- Employees of the business must be covered by the plan once they meet the plan's eligibility requirements.
UBS Financial Services Inc. does not provide legal or tax advice. Clients should be advised to consult with their legal/tax advisor when making decisions about a retirement plan.
The Small Business Pension Program is a service mark of
UBS Financial Services Inc.
Not for public use.
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Knowing Your Clients, Delivering Value
Henry Grinberg is a UBS Financial Advisor, working out of the Aventura, Florida office. Prior to becoming a UBS Financial Advisor three years ago, he sold the software development company he had built.
Henry's clientele includes many doctors, entrepreneurs and small business owners. Henry said, "Successful individuals go to a financial planner for only three reasons: To help pay for their children's or
grandchildren's education, to prepare for retirement or to plan the transfer of their assets when they die." In the past year, two of Henry's existing clients have opened Small Business Pension Programs, a real estate agent and a commercial real estate broker, both in their mid-50's. In both cases, the clients were primarily motivated by tax savings. UBS does not provide tax or legal advice, but Henry works very closely with his clients' tax advisors and estate planning attorneys.
Both clients are very successful. The real estate agent's annual earned income is in excess of $500,000 annually; the commercial real estate broker substantially more. Self-employed individuals with high incomes typically are looking for ways to reduce or defer their tax liability. The real estate agent qualified to make a maximum contribution of approximately $150,000 annually, but, concerned about a possible drop in the real estate market, she decided to structure a lower benefit formula for her plan so that her required annual contribution would be closer to $100,000.
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Results in these Cases
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| Real Estate Agent
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Income: $500K+
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Age: 54 |
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First Year Estimated Contribution: $100,000 |
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First Year Taxes Saved*: about $40,000 |
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Previous retirement plan: a SEP
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| Commercial Real Estate Broker
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Income: $1 million+
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Age: 53 |
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First Year Estimated Contribution: $140,000 |
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First Year Taxes Saved*: about $56,000 |
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Previous retirement plan: No previous retirement plan
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* These estimates are based on the Business Owner's contribution and assume a marginal rate of 40% for combined Federal and state income taxes.
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The real estate agent had a SEP, which she terminated and rolled into an IRA. Surprisingly, the commercial real estate broker had not opened a qualified retirement plan before.
Henry was asked whether he could offer any suggestions to other Financial Advisors. He said it's simple: "You need to know your clients well; your clients need to trust you; and you need to deliver real value to them."
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KEY DATES
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Plans must be opened by
12/31/05 or the end of your client's fiscal year
Don't delay — submit forms early!
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| Questions? |
For more information call Retirement Consulting Services at: 1-(888)-738-1546, option 1.
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