Retirement Planning Does Take Planning! But it also Takes Focus & Commitment

To Inquire About Planning for Your Retirement

Our Process   •   Types of Financial Vehicles/Asset Classes   •   Traditional IRA  •   Roth IRA   •  
Business Retirement Plans

An Overview- Retirement planning can actually be looked upon as life’s most major purchase! It is basically the proactive purchase of older years’ lifestyle which can constitute about 30% of the whole lifespan. Therefore, it should be incumbent upon everyone to be proactive, deliberate, and intentional in building and paying attention to their retirement nest egg. In contributing towards a retirement plan, the approach should be a long term and a disciplined one that is coupled with the avoidance of making emotional decisions, especially during periods of market declines.

At Capital Shield, we specialize in Retirement Planning where we use well thought out processes and financial instruments to create properly prepared retirement blueprints. To devise a successful retirement plan, besides growth rate, we also consider all the other relevant factors such as tax implications, plan duration, and risk management, just to name a few. We, therefore, diversify our plan investments into not just a portfolio of several mutual funds, but also into different asset classes such as Annuities and or Maximum Funded Life Insurance Contracts for maximum tax efficiency. However, it should be mentioned that mutual funds happen to be the most popular funding vehicles for Qualified Retirement Plans such as IRAs or 401Ks. The use of the word “Qualified” is in reference to the plans’ eligibility for certain IRS rules & tax advantages.

In a nutshell: IRAs & 401Ks are legal tax & regulation structures that are intended for retirement. Mutual funds & annuities are financial vehicles or instruments that can be used to fund these retirement plans.

Our Process of Setting Up a Retirement Plan Contains:

  • An Introduction Meeting: As the initial stage of a long-term working relationship, we use this opportunity to introduce ourselves, our culture, and the way the process is undertaken. We also get to know our prospective client and their aspirations.
  • The Presentation: At this stage, we discuss the available financial instruments that can be used in the planning of a Retirement portfolio, and we explain them in detail. Contrary to the industry’s common belief, we believe that conveying product knowledge to clients and educating them about the instruments used in their portfolio is absolutely essential for their plan’s success.
  • A Comprehensive Fact-Finding Interview: We conduct a meeting dedicated to what is known as “fact finding” which helps us devise accurate plans, fully capable of delivering the client’s financial and retirement goals. By Fact finding, we focus on a client’s current financial standing and his/her future aspirations. That way, we devise strong financial plans that is tailored to the specific needs and goals of each client.

Common Types of Financial Vehicles/ Asset Classes
Used in Retirement Planning:

For a Side by Side, Comparative Illustration of Different Asset Class Performances

Mutual Funds   •   Annuities   •   Maximum Funded Life Insurance Contracts

Mutual Funds: They are popular tools in funding retirement plans and have been for many decades. A single mutual fund can purchase stocks in over 50 different companies, and that’s a testament to its’ diversification attempts to both increase its’ chances of gain as well as to reduce the loss ratio in a market decline. Based on investment goals, mutual funds are generally divided into 4 categories:

1) Ultra Aggressive: This category is typically consisted of mutual funds that seek higher than average growth, so they invest in small and medium capitalization companies. Theoretically, small & medium cap companies exhibit greater potentials for growth, while being also more risk prone, hence, the title “Ultra aggressive”. These size companies are generally the producers of a new product or service which might have a much greater room for growth than the already familiar products & services of more established companies.

2) Aggressive: The mutual funds in this category seek growth via investing in mostly Large Cap companies which tend to be the more established ones with familiar products and or services. Some established companies tend to also pay quarterly or annual dividends which make them an even more attractive option. The risk proneness of these companies might be less than the small & medium cap companies in the ultra-aggressive category. 3) Moderate: This category is typically a mixed bag of securities and bonds. In other words, the mutual funds that are considered “Moderate” invest in both large cap companies as well as bond portfolios in an attempt to reduce risk. So essentially, moderate mutual funds are willing to forgo the type of growth that the mutual funds in “aggressive” or “ultra-aggressive” categories may experience in order to have less risk exposure.

4) Conservative: Investors that choose this category generally seek capital (their money) preservation, and, they are therefore willing to forgo a substantial amount of growth potential. So, the mutual funds in this category invest majority of their funds into a variety types of bonds and money markets.

Note: We think that for the purposes of diversification and risk management, any retirement portfolio must contain mutual funds from at least 3 of the 4 mentioned categories, if not from all 4. However, the selection must be based on the portfolio holder’s age, risk tolerance level, and financial goals.

Annuities: The 2 main features of Annuities that make them unique, are their ability to preserve the invested principal and to provide a lifetime of income, both features guaranteed by contract. Annuities are the only financial instruments that provide such features. With the advent of Index Annuities, the guaranteed lifetime income feature has been enhanced significantly, and so has its’ earning potential. The inclusion of Index Annuities in a retirement portfolio gives a portion of it the ability to generate a guaranteed lifetime of income, as well as having stronger earning potentials than a traditional Annuity. For more information, please refer to the Annuities section of this website.

Maximum Funded Life Insurance Contracts: At first glance, it might seem counter intuitive to suggest a Life Insurance contract for a retirement portfolio, but once the product, as a whole and not in bits and pieces, is understood, it’s counter intuitive no more! Our recommended life insurance product for retirement planning is the Index Universal Life (IUL) policy. There are 3 features of an IUL that make it a remarkably attractive product in any retirement scenario. Its’ caps being much higher than annuities, giving it a higher earning potential while being protected at the zero floor.

Tax free retirement income through a properly designed regiment of borrowing from the policy’s cash value. It should be noted that the perpetual borrowing ability rendered in a life insurance environment means that the policy owner will never have to cater the debt directly by sending monthly payments, but all of that is done internally and upon the insured’s death. This method of income generation actually yields more income than a qualified plan, like IRA, could ever do. The reason being the concept of Positive Arbitrage. A powerful financial concept understood by the few. For more information on IULs, please check out our Permanent Life Insurance section, under IUL. However, to fully understand the product and all the financial concepts embedded in it, please either register to one of our webinars, or call us directly.

For a Side by Side, Comparative Illustration of Different Asset Class Performances

Qualified Retirement Plans- A General Overview

They are retirement plan chassis that are eligible for certain tax advantages under the Internal Revenue Code (IRC) laws, hence the name “Qualified”. The main features of qualified plans revolve around the areas of taxation, access to the funds, and funding limits. Here are highlights of what they mean:

Taxation: All qualified plans allow for the full tax deductibility of the monies that go into the plans each year, except the “Roth” plans. However, the monies are fully taxable at the account owner’s income tax rate when being distributed during retirement years. So, it’s a “deduct now, pay taxes later” construct.

Fund Access: A 10% penalty is levied upon those individuals who withdraw money from their qualified accounts prior to age 59 1/2. And that is on top of taxes! However, access or withdrawals are penalty free after the age 59 1/2. This provision is placed to encourage people to allow for the growth and accumulation of their accounts. There are certain life events that will cause the 10% penalty to be waived if the monies are needed prior to age 59 1/2. Some of the events are illness, disability, and 1st time home buying. The flip side of the age 59 ½ rule is another rule that requires individuals to withdraw at least a minimum amount from their retirement accounts starting age 70 ½. It is called “Required Minimum Distribution” or RMD for short. The RMD amount is calculated by dividing the retirement account balance as of December 31 of prior year by the individual’s life expectancy factor which can be obtained from the IRS Uniform Lifetime Table.

Funding Limits: Each qualified plan has a limit or a maximum amount that can be invested in it per year. As an example, the maximum amount that can be invested into an IRA account for the year 2020 is $6,000 for folks under age 50, and $7,000 for those over that age.

Qualified Retirement Accounts can be set up for both Individuals and Businesses. The most common ones are:

  • For Individuals: Traditional IRA and Roth IRA
  • For Businesses: 1) SEP IRA. 2) SIMPLE IRA. 3) 401K

Individual Retirement Accounts (IRAs)

For a Comparative Illustration of a Roth IRA vs. the Traditional IRA

Traditional IRA: Individual Retirement Accounts, or IRAs for short, allow for up to $6,000 in annual investments for people under the age of 50, and $7,000 for people over the age. The entire amount invested each year is tax deductible for that year, however, all withdrawals are taxable at the account owner’s income tax rate. For early withdrawals, prior to age 59 ½, there is a 10% penalty on top of taxes. This provision is meant to discourage people from using their accounts for reasons other than retirement. However, early penalty free access prior to age 59 ½ is permitted under certain life event conditions such as illness, disability, and first-time home purchase.

Traditional IRA Income Limits for Contribution Eligibility

  • Single Filing: For 2020, filing single, you can make a full contribution if your modified adjusted gross income is less than $124,000, and If your modified adjusted gross income is more than $124,000 but less than $139,000, a partial contribution is allowed.
  • Joint Filing: For married couples filing Jointly, an income of less than $196,000 will make you both eligible to make the full contribution for each. And, incomes Between $196,000 and $206,000 will allow a reduced amount of contribution. Couples making over $206,000 are not eligible for IRA contributions.

Roth IRA: The investment limits and access regulations of Roth IRAs are identical to those of a Traditional IRA. The main difference between the two is that Roth IRA does not allow for the deduction of the monies invested each year, but on the other hand, it allows for all withdrawals after age 59 ½ to be tax free.

Roth IRA Income Limits for Contribution Eligibility

  • Single Filing: If you file taxes as a single person, your Modified Adjusted Gross Income (MAGI) must be under $139,000 for the tax year 2020 to contribute to a Roth IRA.
  • Joint Filing: if you're married and filing jointly, your MAGI must be under $206,000 for the tax 2020.

Business Qualified Retirement Plans:

For a Complete Presentation of a Busienss Qualified Plan

SEP IRA: Simplified Employee Pension or SEP IRA is a retirement plan designed for small businesses, especially the ones with single employee/owner, couples owned and employed, or a small group of business partners/employees. In other words, it’s a great plan for businesses that are only owner-employed with no outside/non-owner employees involved. Administratively, SEP IRAs are also the easiest plans to both set up and administer, and the costs associated with it are quite minimal. Investments into a SEP IRA are fully tax deductible, and the growth is tax deferred, however, all withdrawals after the age of 59 ½ are taxable at the owner’s income tax rate. A 10% penalty is levied upon withdrawals prior to age 59 ½, unless certain life events such as illness or disability, or needing funds for 1st time homebuyers, would deem the withdrawals as necessary.

Contribution Limits: For year 2020, it is 25% of the employee’s compensation or $57,000 per year, whichever is less.

SIMPLE IRA: "SIMPLE" stands for "Savings Incentive Match Plan for Employees," and "IRA" stands for "Individual Retirement Account", and it is an employer sponsored plan for small businesses. As in a traditional IRA, contributions into a SIMPLE IRA is tax deductible. Contribution Limits & Regulations: For 2020, the annual contribution limit for the both employees & employers is $13,500, and workers age 50 or older can make additional catch-up contributions of $3,000, for a total of $16,500. Employers are required by law to contribute at a certain minimum level towards their employees’ accounts. As an “Elective” contribution, the employer is required to match, dollar to dollar, up to 3% of the employee’s salary if the employee contributes himself. The Employer also has the option of reducing the matching percentage to 1% for no more than 2 out of 5 years. The other option which is called “Non-Elective” allows an employer to contribute a flat 2% of each eligible employee’s salary regardless of whether the employee chooses to make contributions.

401k Plans: They are the most popular retirement plans that are offered through employers. As with other qualified plans, 401K contributions are tax deductible, and are often matched by employers by up to a certain percentage. Gains in the plan grow tax deferred until the time of withdrawals which typically occur after the age of 59 ½. Withdrawals prior to age 59 ½ are subject to a 10% penalty on top of taxes unless they are used for emergency life events such as illness or disability. The penalty is also waived if the funds are used towards first time home purchase. The 2020 annual contribution limit is $19,500, and for employees aged 50 and over, the limit has been increased to $26,000. Annual contributions into a 401k plan are also called Salary Deferrals. Employers typically match up to 3% of an employee’s contribution, dollar to dollar, and, 50% of the contribution amount between 3% & 5%.

The Problem with a Traditional 401K! Traditional 401k plans have certain compliance issues that can significantly limit the amount of annual contributions that the business owners, company officers, and high wage earners, often referred to as highly compensated employees (HCEs), can make towards their plans. The 3 compliance tests that need to be performed annually are known as the 1) Actual Deferral Percentage (ADP). 2) The Actual Contribution Percentage (ACP). 3) The Top-heavy testing.

  • What are ADP and ACP testing? These special non-discrimination rules ensure that deferrals made by HCEs are not disproportionate to deferrals made by non-HCEs. The purpose of these tests is to make sure that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees (HCE).
  • What is Top-heavy testing? This rule prevents plan assets of key employees to be comprised of 60% or more of the total assets in the plan. Key employees are defined as employees who own more than 5% of the business, their spouses, and lineal relatives, as well as certain shareholders and company officers.

The “Safe Harbor” Provision in a 401K

For a 401(k) plan to be considered a safe harbor plan, employers must satisfy certain contribution, vesting, and notice requirements. The advantages & obligations of a Safe Harbor plan for the business owners, officers, and other highly paid employees can be summarized as follows:

  • It eliminates the need for the burdensome and costly 401K compliance testing.
  • By giving up the gradual vesting of the employees’ 401k plans which takes 6 years to achieve 100% vesting, the company owners and officers gain the advantage of being able to maximize their own annual contribution without being bound by the rank & file employees’ contribution percentages.
  • To meet the Safe Harbor provision, the plan sponsor is required to make 1 of 4 IRS-mandated contributions to its employees. The most popular one being the “Basic Match”: a 100% employer matching contribution to all employee salary deferrals up to 3% of their compensation, and then a 50% match on the next 2% of their compensation.

The following is an example of how the rank & file employee contribution percentages can prevent the owners and officers from maximizing their contributions to their own accounts without the “Safe Harbor” provision.

  • Imagine your company has 11 people who are eligible to contribute to a 401(k) plan. Of those 11 people, only one is considered highly compensated. Of the remaining 10, only 5 contribute to a traditional 401(k) plan. Of those 5 employees, each contributes 4%. Thus, the average of those 10 eligible employees is 2% of the entire group. The 5 employees are considered non-participating because they eligible to participate and don’t; their non-participation brings down the average. Under the ADP and ACP testing rules, the highly compensated employee can contribute only 4%, which is based on the average of the non-HCE group rate, plus an additional 2%. Everything above that is returned to them as compensation—and it is taxed. This is a source of frustration to highly compensated individuals because they can’t max out their contributions, thus lessening their ability to reach their investment goals with their 401(k) plans.

"Profit Sharing Plans"

Profit sharing 401(k) plans work like this: A business sets aside a portion of its pre-tax profits to contribute to their employees’ retirement accounts. Business owners can award that money to their employees as a percentage of their salary or as a set dollar amount. For profit sharing 401(k) plans, the yearly contribution limit is $56,000 per employee (or 100% of their salary, whichever amount is lower). Profit sharing can be added to a 401(k) plan with a simple plan amendment. To implement a profit-sharing plan, all businesses must fill out an Internal Revenue Service Form 5500 and disclose all participants of the plan. 

A profit-sharing plan is available for a business of any size, and a company can establish one even if it already has other retirement plans. Further, a company has a lot of flexibility in how it can implement a profit-sharing plan. As with a 401(k) plan, an employer has full discretion over how and when it makes contributions. However, all companies have to prove that a profit-sharing plan does not discriminate in favor of highly compensated employees. And, to remedy the “discrimination” factor, the “Safe Harbor” provision comes into play.

Business owners as employers decide how much they want to allocate to each employee. A company that offers a profit-sharing plan adjusts it as needed, sometimes making zero contributions in some years. In the years when it makes contributions, however, the company must come up with a set formula for profit allocation.

The most common way for a business to determine the allocation of a profit-sharing plan is through the comp-to-comp method. Using this calculation, an employer first calculates the sum total of all its employees’ compensation. Then, to determine what percentage of the profit-sharing plan, an employee is entitled to, the company divides each employee’s annual compensation by that total. To arrive at the amount due to the employee, that percentage is multiplied by the amount of total profits being shared.

An Example of a Profit-Sharing Plan

Let’s assume a business with only two employees uses a comp-to-comp method for profit sharing. In this case, employee A earns $50,000 a year, and employee B earns $100,000 a year. If the business owner shares 10% of the annual profits and the business earns $100,000 in a fiscal year, the company would allocate profit share as follows:

  • Employee A = ($100,000 X 0.10) X ($50,000 / $150,000), or $3,333.33
  • Employee B = ($100,000 X 0.10) X ($100,000 / $150,000), or $6,666.67

401k plans are generally set up, managed & maintained by a Third-Party Administrator or “TPA” which is typically an outside independent contractor. By working with a TPA, an employer can essentially eliminate all set up, compliance, and maintenance related issues from its’ workload. Many of the TPA’s also offer employee payroll services at minimal costs. With sophisticated computer websites, a TPA offers full access to all accounts for both the employees & the employer.

For a Complete Presentation of a Business Qualified Plan