QRP-Qualified Retirement Plan Expedite Your Retirement Plan and Financial Leverage

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1 QRP-Qualified Retirement Plan Expedite Your Retirement Plan and Financial Leverage Today, more than ever, Americans realize the importance of saving for the future. Most experts estimate that the average American will need between $1.2 million to $1.5 million in a retirement plan to provide for a reasonable lifestyle after retirement. They also estimate that 8 months of expenses should be put aside for unexpected financial emergencies or about $30,000 to $50,000 for the average worker. Qualified retirement plans can provide many tax and nontax benefits to employers as well as to employees. A qualified retirement plan can: 1. Help employers attract and retain better employees, thereby reducing turnover and new employee training costs. 2. Employers can immediately deduct their contributions (within certain limits) into a qualified plan and may even be entitled to receive a tax credit for the costs of implementing the plan. The balance of the cost can be deducted on your tax return. 3. Employees pay no income tax on employer contributions (within certain limitations) until the funds are distributed. 4. Employees benefit from the tax-free accumulation of earnings. 5. Employees generally may make pretax contributions from their compensation to a qualified plan (thereby lowering participants taxable income). 6. One of the greatest advantages of qualified plans is that retirement savings from defined contribution plans are portable. Eligible funds can be rolled over to another defined contribution plan (or IRA), in accordance with certain requirements, thereby helping employees continue to build their nest egg and cut down on the excess paperwork caused by maintaining several retirement accounts. 7. The U.S. government will even pay you back a portion of your contribution to a retirement plan up to $1,000 each year per participant for taxpayers in low tax brackets Form 8880 is used to claim the credit. There are two main categories of retirement plans: defined benefit plans and defined contribution plans. Defined Benefit Plans Defined benefit plans predict what an employee will receive in benefits upon retirement. The predicted benefit amount is based on a variety of factors such as the employee s compensation, age, anticipated age of retirement, and the

2 estimated amount of what the plan can earn over the years. An actuary determines the amount that an employer must contribute each year in order to be sure that funds will be there when the employee retires. The employer takes a deduction for the actuarially determined contribution, which can be significantly greater than Defined Contribution Plans. Defined Contribution Plans Defined contribution plans are similar to savings accounts. The employer contributes to an account for each employee which may not actually be a separate account. The contribution is based on a defined formula, such as a percentage of the employee s compensation. The benefits that are ultimately paid to an employee are based on what the contributions actually earn and how much the employer and/or employees contributed over the years. Profit Sharing Plans There are a variety of plans under the umbrella of defined contribution plans. One of the most common is the profit-sharing plan. Profit sharing plans allow the company to decide if they want to make a contribution in a given year and determine the contribution amount. Under this plan, the employer agrees to contribute a percentage of the employee s compensation to the plan. The allocation is usually based purely on an employee s relative compensation. 401(k) Plan Perhaps the most popular type of defined contribution plan today is the 401(k) plan. The 401(k) plan, also known as a cash and deferred compensation arrangement, is said to be the most popular type of defined contribution plan. The 401(k) plan allows employee contributions to be made through salary reduction arrangements that let them fund their retirement plan with pretax dollars. These employee contributions are called elective deferrals. Employers often match a percentage of employee elective deferrals as a way to encourage participation, something desirable so that owners, executives, and other highlypaid employees can benefit. In addition to pretax contributions, a 401(k) plan may offer a Roth contribution option. Regardless of the plan selected, all plans have similar requirements designed to ensure that they not only benefit owners and top executives, but also ordinary workers (if any). The Safe Harbor 401(k) plan is just one type of plan you could invest in. Key features include: The plan allows all participants to contribute up to maximum annual deferral limit ($16,500), plus catch up ($5,500) contributions for employees age 50 and over. Requires a flat contribution of 3% of pay or a 100% match on salary deferrals up to 4% of pay. Eliminates the burden of restrictive discrimination testing. Allocation of additional profit sharing may be customized to benefit plan

3 sponsors and/or select groups of employees. Vesting of required contributions is 100% immediately. Allows additional matching and/or profit sharing contributions The example below shows the amount of contributions and deductions a business owner can take who has a few employees. Compensation Salary Profit Total Deferral Sharing Contribution Participant $ 17,000 discretionary $ 850 $ 850 Participant $ 30,000 discretionary $ 1,500 $ 1,500 Participant $ 40,000 discretionary $ 2,000 $ 2,000 Owner $245,000 $22,000 $ 32,500 $ 54,500 Totals $332,000 $22,000 $ 36,850 $ 58,850 Almost every type of business entity may establish a retirement plan (sole proprietor, corporation, LLCs and partnerships). Business owners and their employees can gain significant tax advantages by participating in a companysponsored retirement plan. Contributions to a qualified retirement plan for yourself and any eligible employees are tax deductible, within tax law limits. All plan participants (including you) can defer paying income taxes until distributions are received from the plan. Advantages of a Qualified Plan vs. an IRA Qualified Plan IRA Can you borrow from your retirement account? Debt financing on real estate without adverse tax consequences? Deductable contribution limit for 2009? - Permitted up to $50,000 or ½ vested account Permitted $49,000 for 401(k), profit sharing and $195,000 for defined benefit plan -ERISA provided protection Not permitted Only $5,000 Protection from creditors? No-ERISA protection Some Limited Protection Ability to purchase life Not permitted

4 insurance? Ability to be your own trustee, writes and sign checks, and directly controls your plan assets? Employee contribution (elective deferrals) Catch up contributions over age 50 Are distributions allowed For hardships Stockholder in a Sub Chapter S Corporation Sub Chapter S Corporation Investments Not permitted $16,500 Not Permitted $5,500 $1,000 NO To find out more about how a QRT will benefit your situation, the process involved and questions you have may, call QRP, LLC at (916) or Michael Hawes at michaelh@hawescpa.com. Let them know you were referred by NCP. Listen to a complete interview with CPA, Michael Hawes discussing the power of a Qualified Retirement Plan, go to which will go into more detail on the benefits, and annual requirements. Q: What is the investment for a self-directed Qualified Retirement Plan through QRP, LLC? A: The investment is $2,495 which includes everything from the adoption agreement, basic plan documents, IRS letter, summary plan description, record of action, trust only, summary of EGTRRA Changes, Forms and a training manual with two CDs filled with Q&A on the self-directed Qualified Retirement Plan. There is no annual maintenance fee. More details are included in the 60 minute interview with Michael Hawes, at

5 About the Author: Michael S. Hawes has over 25 years of professional experience as a Certified Public Accountant. He is the founder of a professional tax and accounting practice and is also the founder of QRP, LLC that has served thousands of investors, business owners, individuals and families. As a CPA, Michael has represented clients in over 800 separate business purchases, sales and startups, and has worked with over 3,000 business entities, helping them with capitalization requirements, obtaining business financing and developing financially credible long-term business plans.