Your Estate Plan: Ideas You Can Really Use

Securing your Retirement starts with your Employment

By Earl H. Cohen, Attorney at Law

The qualified and nonqualified retirement plans sponsored by your employer represent an important key to your retirement. With the security markets in freefall, opening a retirement account statement today can provide a shock for most plan participants. That shock may lead some retirement plan participants to stop making voluntary contributions or even make some companies terminate their plans. Those would be the wrong moves.

Consider the normal sources of possible retirement income: Social Security, Qualified Retirement Plans, Nonqualified Retirement Plans, individual savings and investment plans, continuing working and tapping home equity. The reality is there are limited alternatives to achieving your retirement goals beyond participation in your employer's retirement plans: saving more on an after-tax basis, earning a lot more on your invested assets until retirement, spending less during retirement and/or retiring later. These alternative paths are often not attractive for most people. However, the tax and non-tax benefits of participating in an employer-based plan are very compelling.

Qualified plans, allowing pretax contributions:

• Reduce your current income by the amount of your contributions;
• Grow on a tax deferred basis; and
• Are taxable at the time of withdrawal in retirement when you will likely be taxed at lower rates.

Nonqualified plans, providing for after tax contributions:

• Grow on a tax deferred basis; and
• May have no tax upon withdrawal of plan proceeds if handled correctly.

What is really compelling are the growth opportunities available in a qualified plan especially in a plan offering an employer match. Take this example:

• Carlson Manufacturing with 45 employees and a combination 401k and profit sharing plan. Carlson provides a 50 percent match on the first six percent of employee contribution to the 401k plan and a profit sharing contribution in good years.
• John, one of Carlson's managers earns $75,000 per year and is considering whether and at what level to participate in the plan. Six percent of his compensation would be $4,500 per year. His employer's match would be $2,250, a 50% immediate return on his contribution.
• If John didn't contribute to the plan and instead saved outside the plan, the $4,500 would be reduced by taxes of about 20 percent (state and federal) or $900 leaving $3,600 to invest.
• At the end of the year John's:
• Qualified plan account (without investment earnings or losses) would be worth $6,750; and, if he didn't participate in his employer's plan,
• His individual account (without investment earnings or losses) would be worth $3,600.
• The decision is, as we might say: "A no-brainer!"

For those concerned about the investment opportunities, especially in volatile markets, there are safe, low volatile options that can and should be a part of every employer based plan.

Feel free to call us for more information on employer-based qualified and nonqualified plans and any other business planning issues.