John Rogers, who started a defined-benefit retirement plan several years ago, in Niwot, Colo., Nov. 28, 2012. A defined-benefit plan is ideal for small-business owners in their 50s, like Rogers, who have saved little for retirement but can now afford to put aside a fixed amount of money each year.

Kevin Moloney, Nyt - Nyt

Save for retirement in just 10 years? Doable, but risky

  • Article by: PAUL SULLIVAN
  • New York Times
  • December 8, 2012 - 9:45 PM

With the prospect of significant changes in tax rates and deduction limits, taxpayers have been coming up with all sorts of strategies to save on their taxes, some riskier than others.

So I couldn't help but be skeptical when I was told about a plan aimed at small-business owners in their 50s who have saved little for retirement but can now afford to put aside a lot of money each year. They can then deduct that money as a business expense, resulting in a significant tax savings.

I checked with the Internal Revenue Service, and the plan is, indeed, legitimate. It is a defined-benefit plan, much like the one large employers once regularly offered their workers, that guarantees a set monthly payment in retirement. In this case, though, the plan works best for really small businesses -- those that employ just one or two people.

The IRS allows a maximum annual contribution to the plan of about $255,000 for people in their 50s. (For younger workers, the contribution limit is lower.) Total holdings in the plan are limited to $2.3 million to $2.4 million, enough to cover the maximum allowed payment in retirement of $200,000 a year.

"It's not too good to be true," said Lisa Germano, president and general counsel at Actuarial Benefits and Design Co. in Midlothian, Va. "But you need to be able to fund the plan and fund it for an indefinite period. It's a commitment. That's one of the reasons you get the reward."

Some advisers were worried that, like other generous deductions, this one could be threatened in the current tax and budget negotiations. But regardless of how the talks in Washington turn out, this is still the time of year when many small-business owners need to decide whether to set up a defined-benefit plan or stick with more traditional forms of retirement savings, like SEP IRAs for the self-employed or a profit-sharing plan.

Upside: Defined-benefit plans are mainly a way for small-business owners who neglected to save for retirement to catch up. The ideal candidates can put away $100,000 to $150,000 a year for at least 10 years, said Leigh Goldblatt, vice president and chief compliance officer at Glazer Financial Network.

This was the case with John Rogers, a Denver businessman. "I was in my late 50s and I didn't have a penny saved for retirement," he said.

He lost his life savings in his 40s, he said, in a recycling company he started with friends. He also raised six children, four of whom he said he put through college.

With his business providing steady, predictable income -- he and his wife are ranked as top sellers for Univera, a nutritional supplement company -- he wanted to start saving. He said a defined-benefit plan was attractive for both deferring taxes and for saving for retirement.

"We're very disciplined,'' said Rogers, 63. "We pay our defined-benefit plan first and then our business expenses."

Downside: Skeptics say these plans lure people with the prospect of quick and large retirement savings without discussing the risks.

"The primary problem with defined-benefit plans is you have to fund at least to a minimum level each year," said Jerry Love, a certified public accountant in Abilene, Texas. "You also have to have an actuary do your actuarial analysis each year. And you have to fund the minimum amount, or your plan's in violation and you have all kinds of problems."

Since the retirement benefit is set, it is the responsibility of the person who created the plan to make sure it is financed to that level.

"The No. 1 thing that happens to people is their company or industry takes a dip and they don't have the cash flow to fund the plan," Love said. "There is no option. You have to fund this."

For a company with only one or two employees, that problem is somewhat easier to manage. The plan could be reworked to lower the ultimate benefit if the owner cannot make the minimum payment or an additional payment, said Greg Stevens, senior financial counselor at Cabot Money Management.

But reworking a plan comes at a cost, which is another criticism of defined-benefit plans. Even if everything runs smoothly, the owner still has to pay someone $6,000 to $7,000 a year to do the actuarial calculations and handle the necessary filings, Stevens said.

"As soon as you get to the point where you're not making contributions, you should dissolve it," Stevens said. But to be compliant with the IRS, he said, the plan needs to be in place for at least five years.

Sharyn Cerniglia, who owns American Recycling Systems, which sells heavy equipment to the military, said her contract with the Defense Department had expired after 15 years. If it is not renewed, she said, she might retire.

However bittersweet that might be, she and her husband, who helps run the company, have been able to save a lot of money through a defined-benefit plan they set up in 2006.

"We have a couple of million put away that we wouldn't have put away otherwise," she said.

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