[00:00:06] Andrew Rafal: Welcome back, everybody, to a brand new episode of Your Wealth & Beyond and today, super excited to have on a good friend, a colleague, someone I highly respect. We’re going to talk all things retirement planning for business owners. Brian Hartstein, welcome to the podcast. How are you doing this morning?  

[00:00:24] Brian Hartstein: I’m doing great, Andrew. Really excited and also honored to be on the podcast. I’ve listened to so many good ones. It’s great to be actually a participant at this point. 

[00:00:33] Andrew Rafal: And I know this is going to be a little time-sensitive but good win yesterday for your Eagles. It was, as you like to say, a make or break this season, huh? 

[00:00:42] Brian Hartstein: A little scary that that already came in week four that it was a must-win up in Green Bay. And sometimes you just got to hold your breath and hope your team comes through and so far with some of the injuries we had, I think it bodes well for hopefully the rest of the way. 

[00:00:56] Andrew Rafal: Yeah. We’ll keep that good luck up for the Browns this weekend. So, I know you look like you’ve been in the business maybe five years but almost 30 years. And I don’t know what he’s doing, guys. I wish we had this on video but if you haven’t seen, in the show notes we’ll have a link to Brian’s bio but I digress. So, you’ve been in this business for almost 30 years?

[00:01:17] Brian Hartstein: Well, a long time. In fact, I say what I really started in this business is when I started actually in middle school because back then was 1981 when I started my family’s file room of our third-party administrative firm and so again starting to learn the pension business because I have a pension and tax background literally almost from that point. So, I always kid – oh, go ahead. Sorry. 

[00:01:36] Andrew Rafal: No. I’m sorry. Go on. 

[00:01:38] Brian Hartstein: I said I was a kid. I wasn’t trained to do much of anything else so really, it’s a good thing that I really love what I do. 

[00:01:44] Andrew Rafal: And I’m trying to think in ‘81 so I would have been about five. What was the top song going? What were you listening to on the radio in 1981?

[00:01:54] Brian Hartstein: I’m trying to think what was going on back then. It was, you know, probably a lot of new wave, a lot of rock, stuff everything from like AC/DC to Billy Joel and Rick Springfield so a lot of fun stuff, you know, Cars. Great bands, and it’s stuff we can still listen to today. My kids listen to when we’re driving in the car so it’s funny to go back and listen to that past. 

[00:02:12] Andrew Rafal: Yeah. Maybe a little Cure too and Cars, rest in peace. I can’t believe he’s gone. 

[00:02:16] Brian Hartstein: Sure.

[00:02:17] Andrew Rafal: So, in the time I’ve almost been two decades of working with clients and to this point whether it’s an individual, an executive, a retiree, or in this case a business owner, I have yet to have a client sit down with me and say, “Andrew, I want to pay more in taxes.” What about you? Have you had anybody say they want to pay their partner Uncle Sam more in taxes? 

[00:02:40] Brian Hartstein: No. In fact, I haven’t had anybody even say, “Hey, I paid the right amount in taxes.” Most of our clients especially because our client base is really built of the smaller successful privately held business owner. Now, smaller could be 2,000 employees or less, but we’re usually not talking about public companies. And although we do some nonprofit work, that’s really more of our avatar client. And most of them are focused on somehow trying to mitigate their taxes while doing some very sophisticated retirement planning as well. So, I always kid that we can really sum up what we do here quite succinctly and saying, “We help business owners utilize their pretax dollar as effectively as possible.” 

[00:03:21] Andrew Rafal: And listeners, and I know the podcast itself is aimed at business owners helping build wealth, find purpose, but we also have a lot of listeners that work for businesses. So, one thing we don’t want you to do today, if you don’t own a business, don’t tune it out because there’s a couple things you’re going to learn. One is making sure that if your company you work for offers a plan and it doesn’t have to be a sophisticated type plan. It could be something simple. We’re going to teach you some things to go back to the owner or the HR to make sure you’re taking advantage of it and obviously, business owners, one of Brian’s specialties is looking at what type of business you have, how many employees you have, and truly helping to design a plan that’s going to be best for you both short term, medium-term, and long term. And if you happen to have employees, having a retirement type plan is going to help you keep those employees especially in this low unemployment environment. Brian, what are we? Under 4% still right now unemployment? 

[00:04:20] Brian Hartstein: Yes, it’s crazy, especially with low-interest rates, too. I mean, something’s going to change in the future. We just don’t know when. 

[00:04:25] Andrew Rafal: And if you’re an advisor that’s listening to the show, I think you’ll be able to find out some good tidbits too because most of us in this industry, we know enough to be dangerous, but part of the fact of since ‘16, us partnering together, I’ve learned so much and the fact that we at Bayntree we help oversee and help the trustees of almost – is it almost 20 companies right now? 

[00:04:46] Brian Hartstein: Oh, yeah. Well, tens of millions of assets, thousands of employees, many different companies that we help in terms of the advisory capacity on their 401(k) plans, which is, like you said, whether you’re a business owner or an employee, I almost assure you that 90 plus percent of you are probably involved in a pension plan in one form or another and it’s going to be one of the most important stools you have for your retirement, excuse me, legs of your stool that you’re going to have when you get to retirement income planning. So, it’s important for just about every person as they’re moving forward in their working life. 

[00:05:18] Andrew Rafal: So, as we dig in today and talk about solo businesses meaning one employee in the business, if we talk about medium-sized business, larger businesses, but what are some of the things over the time that you’ve been in this business, what are some of the mistakes that you see business owners make and not fully understanding some of the benefits that they’re missing? And it could be them or potentially the planning team that they have, but what are some of those critical mistakes that we can help these listeners get a hold of and start making better decisions? 

[00:05:53] Brian Hartstein: Sure. And the first is maybe not understanding or having all the options explained in the pension arena. And part of that is just understanding the design, knowing your company and your culture, and knowing what your goals are and what you’re trying to achieve. And so, there’s a wide range of different plans and there’s also a range of options for each plan. So, one of the mistakes I see, quite frankly, is people are somewhat just told what to do without having somebody walk them through all of the different options in what we call the pension pyramid, whether it’s a solo 401(k) all the way up to a sophisticated defined benefit pension plan or cash balance plan. So, it’s understanding what those options are and how they fit your needs today, but also trying to project out two, three, even four or five years down the road, what your company may look like, because what might be right today may not be right in the future and you want to make sure what you put in place is hopefully going to be not only beneficial but flexible enough that it can meet your needs going forward. I mean, you could always make adjustments to the plan, but it’s almost imperative that you want to start with the right format from day one. 

[00:06:57] Andrew Rafal: And another thing that we see, not taking anything away from CPAs or tax preparers but, in most cases, a lot of them are reactive. They’re basically just filing the return, they may have a meeting right at that 23rd hour, and they’re not being proactive in that planning process. So, we’ve seen that and then we also see a lot of advisors that are helping the client maybe just on the investment side. They are not coordinating the attack with the CPA. So, when you don’t have those two people talking, or teams talking, then you’re destined for failure. Why do we think that that’s the case working with a lot of clients over these years? Why do you think they are not getting that advice? 

[00:07:38] Brian Hartstein: You know, it’s interesting, and again from the years that you and I’ve been working together, we love the accounting community. We work really closely with it. I always kid if you look at it in medical parlance, they are the primary care physician. We’re somewhat of the specialist like the gastroenterologist where we work in tandem as a team as part of the team approach to solve specific problems for clients. But many of them don’t attack the tax planning retirement planning side until sometimes it’s too late. So, a lot of our planning is done really in the third and fourth quarter when we’re doing tax planning meetings with our clients and their CPAs to prepare so that when we get down to the end of the year, if we do want to utilize some of those options that we’ve got time to put those in place before it’s too late. So, many times, it could be a timing issue where people are too busy or they just haven’t reached out and set the schedule to say, “Look, we want to attack this in a third and fourth quarter,” not wait until after the close of the year, even though we may be busy because we really might be losing out on some opportunities and then eventually the ability to do some a significant tax planning retirement planning in conjunction with each other.

[00:08:44] Andrew Rafal: And when we think about the history of pension plans and then the evolution of the contribution plan, take the listener, let’s walk back. When we do these education workshops for clients and prospective clients, and we ask how many people in here and a lot of them are not maybe a business owner, but how many people in there have a pension plan? And I think right now the average is maybe 10% to 15% will raise their hand. So, over the years, the pension plan, the one that we hear about, the big companies I’m going to work for them for 40 years, and I’m going to have this pension plan, those, Brian, they’ve gone by the wayside, correct, since the advent of the 401(k), the contribution plan in late 70s, early 80s? 

[00:09:26] Brian Hartstein: Sure. And what’s interesting is if you go back to even ERISA in 1974, in fact, my family started a TPA back on the East Coast. It was my father, my grandfather, one of my uncles pre-ERISA 1974 but when you look back in that environment, just like you said, you had a lot of people who might work for a company 30, 40 years. They retire age 65 or 67 and they simply have a check show up in their mail every day for the rest of their lives and maybe even for their spouse’s life. And as we’ve moved forward, many of those larger companies for a variety of reasons sometimes it’s difficult to fund. It can be expensive. Maybe their investments have underperformed, have moved away from what we used to call the kind of that defined benefit pension style plan and have turned more towards the 401(k) profit-sharing plan to provide benefits to employees, which, although they may contribute heavily to a 401(k) is really shifting the burden of retirement planning onto the employee and participant themselves. 

So, it’s really up to them to start their own planning, start as early as they can and do as much as they can because many times although we do see defined benefit pension plans utilized in the small employer market, probably more often now than the big employer market, they’re really turning towards the 401(k) profit-sharing plans to say to someone this is one of your income sources in retirement and we’re going to turn away from that being on the employer to more being toward on the employee.  

[00:10:51] Andrew Rafal: Yeah. I mean, you think about it, the employer can say, “Look, we can take the risk off of us, we could put it on the employee, and good luck.” And so, one of the things before we jump in on the type of plans that are available for business owners, a couple tips for you individuals out there that maybe work for a company that has a 401(k) plan. So, tip number one, if you’re not investing or contributing in the plan, big mistake, right, Brian? I mean, most of these plans offer either Safe Harbor match or it’s not elective where you could get up to some of them, it’s 4%, some as much as 6%. So, if you have a plan and they’re matching you and you’re not putting money into it, you’re giving up free money.

[00:11:33] Brian Hartstein: Absolutely. And not only that, I don’t know any other investment, especially when a company has any type of matching a 401(k) plan without investing your money really at all, you could end up with a 25%, 50%, even 100% rate of return on your dollar from day one simply from the match. I mean, you’re the investment guru. If you tell me there’s a place like that where you can go, I’ll go there but besides the 401(k) I don’t know where anywhere else you can get the type of return without even doing anything with your money. 

[00:11:59] Andrew Rafal: And one area and I know when we start off young I said, “I don’t have enough money to make ends meet,” but it’s like if you put away a little bit even if it’s 3%, at the end of the day, that money is going to start compounding if you’re getting a matching. Then what you do is you set a goal. One of the things we instill in our clients is, “Hey, every year automatically increase it by 1%. If you increase your salary and your expenses stayed level instead of trying to keep up with the Joneses, maybe increase it 2% or 3%.” But I don’t know how many times we’ve sat with individual clients over the years, and they may have never made more than 100,000 in their entire career, but they’re 65 years of age, and they’ve got over a million-plus dollars in their IRA or 401(k) accounts or tax-deferred accounts. It didn’t happen overnight, but they did habitually put money away. They had a game plan. They kept the emotions out of it. So, all of you out there, the earlier you start, the better. Stick to a plan. Don’t try to time the market. Have good advice on from somebody helping you choose the right selections, especially as you start growing that money. So, that’s tip number one. 

I think tip number two, Brian, we’re seeing this more and more now is asking if your plan has a Roth option, an after-tax option. Why do we think that’s so important in today’s world, especially if we’re just starting off, and we have low income in this low tax environment that we’re in? 

[00:13:20] Brian Hartstein: Yeah. And I think obviously, you hit the nail on the head right there when it comes down to taxes. So, with the traditional 401(k) contribution, obviously, you’re getting tax deduction and tax relief today. The monies will grow protected from taxes while they’re in the account. But ultimately, you’re going to pay taxes whenever those monies come out in retirement, when you take them out in that given year. So, we don’t ultimately know where taxes are going to be in the future. If you go back to 1913 and look at the tax system, as it was officially put in place in this country, you know, it’s moved well over 25 times anywhere from 7% to over 90. So, if you look at where we are today, we’re in a very, very low area in that spectrum. So, we don’t know what taxes are in the future, but it helps people today with tax deductions. 

Roth is simply the opposite. You’re going to pay taxes today and you don’t mind doing that. You have monies protected from taxes while they grow just like the traditional side. But ultimately, you’re going to get your money’s out tax-free. So, you don’t have to worry about what taxes are going to be in the future. You know what they are today. So, really a Roth and a traditional, the difference is I either want to pay my taxes today or I want to pay them in the future. And again, depending on the person, one might be the right fit. Maybe it’s a combination that’s a right fit. Obviously, the rule of thumb is the younger you are probably the better a Roth is for you but that’s not always the case. But it’s really how you feel about taxes and where you think taxes are going to be in the future.

[00:14:42] Andrew Rafal: Excellent. So, those are some quick tips for the individual. Now, let’s jump into some of the plans that are available if we run our own business. And listeners, this doesn’t mean we have to have 100 employees. You may have a job or your W2, but you may do some work where you’re getting paid 1099. So, if we look at this, it’s wide open. And if you’ve got in, coming in from other sources, we just want to make sure that you understand what’s out there. All of this will be in the show notes. We’ve got some great charts and graphs. You don’t have to memorize all this. So, Brian, let’s talk about some of the simpler plans for the small business owner. Let’s go down that path first. Let’s walk through pros and cons kind of contribution limits what they should look for and then we can move on to more of the not complicated, but some of the things that we can do to put even more money away. 

[00:15:34] Brian Hartstein: Sure. And I look at it and I think a lot of people in the pension sure look at this kind of a pension pyramid. So, we start at the bottom, we start moving our way towards the top, and we always say, “Look, we will give you all the options of a pension plan but we’re not here to tell you this one fits perfect.” Part of it is what is your goal, how much each year do you think that if you could put away monies into a pension plan, what would that number be? And many times, what that number is going to be is going to dictate what type of pension plan might be the right fit for you and however you’re trying to run your company, and what you’re trying to achieve in the future. So, if you look at the bottom of that pyramid, and not that they’re bad. They’re much more simple, and they’re geared towards maybe the smaller business owner. It could be obviously a SEP, a simplified employee pension and that’s pretty simple. You can put up to 25% of your compensation away into a pension plan, up to a certain limit, get a tax deduction for that. Monies grow tax-deferred. It will ultimately come out taxable whenever you take them out of the pension plan or if they end up in an IRA. 

You normally don’t want to use that when you have employees because if you’re making those types of contributions for yourself, you have to include employees, but they’re extremely simple to set up. They’re extremely simple to calculate what the contribution is going to be. And we find those plans work for many of our employers. 

[00:16:51] Andrew Rafal: And what are some deadlines that we have to look at to get those accounts, those type of retirement accounts funded? 

[00:16:57] Brian Hartstein: Well, that’s interesting and we look at obviously what we call solo 401(k) plans as well. So, for most pension plans, whether it’s a 401(k) plan, a profit-sharing plan, or even a defined benefit pension plan, there is paperwork that needs to be in place before the end of your fiscal year. Most people’s fiscal year for their entities are 1231 but we do have some with off-calendar fiscal year. So, you have to have certain paperwork in place adopting the plan, putting certain structure in for the plan before the end of the year, but you don’t have to fund it at that particular point. You can literally wait until you file your corporate return to fund the plan and then you can file a return. So many times, we have employers waiting six, seven months into the next year, then making their contribution and file their tax return. The only caveat to that is if you’re going to use the salary deferral portion of a 401(k) where you’re actually deferring part of your salary up to that $19,000 limit for 2019, if you’re under age 50, you’ve got to have that piece in before the end of the year because that’s a salary deferral. 

But if you’re making a profit-sharing plan contribution, if you’re making another pension contribution, you have well into the next fiscal year to still have account for this fiscal year. So, for some employers, that gives them flexibility if there’s cash flow, things that they need to take into consideration. 

[00:18:14] Andrew Rafal: And we’ll talk a little bit about the 401(k), how the solo 401(k) has worked, how we can add profit sharing, but when we look at like a lot of clients that come to us, their CPA may have told them, “Hey, just do a SEP-IRA account. It’s more of the simpler kind. You don’t have to have a TPA firm involved in most cases.” So, let’s walk through pros and cons of that, what we see out there, and then also some of the mistakes that we see if they do have employees and why the SEP may not be the best idea if they’ve got five, six, seven employees. 

[00:18:49] Brian Hartstein: Sure. And so, the SEP is obviously easy to implement. You file one form, it’s tax form, to put it in place, and then you’re pretty much up and running. So, normally we see that with people who are really their own employee, there’s no one else. They can put up to 25% of their compensation away, and there’s a limitation on compensation that you can use each year. So, the government may say, “Hey, it’s wonderful, you made a million dollars this year but the most that you can use for calculation of pension benefits for 2019 is $280,000.” That may be indexed up for next year. But right now, when we’re doing calculation of pension benefits, it doesn’t matter if you make a million dollars, $280,000 is the cap. So, for a SEP, the most you can put away is 25% of your comp. So, what if you’re making 280,000 or less? It’s pretty easy to calculate that amount, put that away each year, take a tax deduction, have it grow tax-deferred, and ultimately whenever you’re going to take the money at retirement is when it will be taxable. 

[00:19:45] Andrew Rafal: Now, you say 25% but isn’t there then a limit to how much we can actually defer in a single year? Money dollar amount-wise? 

[00:19:53] Brian Hartstein: Yes. When you’re looking at like what we call defined contribution limits, so a type of defined-contribution plan would be like a 401(k) or those types of plans. The most that we can put away in a given year is going to be $56,000. So, you can’t go above that limit unless you use if you’re over age 50 for certain types of plans, you can do what’s called a catch-up provision because the government says, “Hey, maybe we’ll start saving until later in life.” So, if you’re over age 50, we want to be able to give you the ability to put a little extra way. So, you could put that extra amount away and not have it count towards the $56,000 cap. That amount for 50 and older is $6,000 for this year. So, you could actually put more way for over age 50 above that $56,000 amount because that catch-up provision doesn’t count towards that cap. But for the most cases that $56,000 limit is going to apply so that doesn’t matter what you do. Once you hit that amount, you’re capped out. 

[00:20:47] Andrew Rafal: Okay. So, it’s a simple plan. We can basically set that up. You do it on your own. You can have an advisor whether it’s a TD Ameritrade, Fidelity, Schwab, Vanguard, pretty simple process there and then you have time to fund it all the way up until the next year. Now, one of the mistakes that we’ve seen over the years and this is again without having a coordinated attack, let’s say the CPA says, “Hey, it makes sense for you to put away 15,000 into your stuff that’s going to help you save 4,000 in taxes,” whatever it may be. Well, if he or she files the return, and you sign it and you didn’t do an extension, and you forgot to put that money in, we’ve got a problem. And we’ve seen it time and time again where the individual say, “Oh, yeah, I’ll get that in,” and then they forget to do it. So, then what happens, Brian? Do we have to amend the tax return but if they’ve already filed and they didn’t do an extension, they’re kind of dead in the water there? 

[00:21:37] Brian Hartstein: Yeah. Unfortunately, and I’m not going to go into the eligibility rules of SEPs because they’re a little bit different than other pension plans but once an employee becomes eligible and you have a SEP in place and you make a contribution, you have to make contribution for them too and that can be quite expensive. So, you have 60,000 a year salaried employee and you put 25% away for yourself, guess what? You’re putting 25% away for that employee as well. So, unfortunately, what happens many times is that people just aren’t, you know, they’re not thinking about it. They didn’t realize they hired two employees, they became eligible, and now they’re stuck making contribution for that year. And then usually what happens is we get brought in, we can say, “Okay, at this point, maybe you want to change the style, the plan, maybe we go to a different type of a plan.” Unfortunately, you’re stuck, though, for that year. So, unless you’re really proactive, you may be making a contribution for employees in a given year when you didn’t plan on it. 

[00:22:26] Andrew Rafal: Right. And so, I think that is one of the big mistakes that we see. The small business owner with maybe two to ten employees that they don’t truly understand is, yes, it’s great that I can put away 25% of my net income, but if they are an employee of yours, if you put away 25% of your income, you have to mandate it by the rulings. You have to do 25% for each employee. 

[00:22:54] Brian Hartstein: Right. Each eligible employee. 

[00:22:57] Andrew Rafal: And there are ways how you can make it where X amount are eligible. But still, somebody making 50,000, you can do the math on that. That’s going to be a nice $12,500 bonus that you ultimately have to give them. And if you don’t, then you’re running to follow some rules. So, that’s where the SEP works really well. If we’re an individual, maybe we’re running a side hustle, side business. We have a lot of doctor clients that end up either doing speaking engagements or they work in the hospitals on the weekends. They’ve got an LLC. That money is paid directly into that. Great, great vehicle, simple vehicle for them to put money away and defer taxes on all of their income. So, that’s a big, big thing, business owners. If you got a SEP, you got to make sure that you’re truly funding for each and every one of your employees. And if not, then you’ve got to go talk to a CPA and figure out what you need to do to fix that. 

[00:23:48] Brian Hartstein: Sure. And usually, if you’ve got at least one or two employees that you’re going to have a conversation with, some tax professional saying, “Okay, is this right for me to keep or should we be looking at something different?” 

[00:23:58] Andrew Rafal: Okay. So, then let’s jump and we see it and it’s more rare now but what about the simple IRA? Give us the high level of that. Why people would use it? What’s the contribution amounts, etcetera? 

[00:24:11] Brian Hartstein: Yeah. Quite frankly, we don’t deal a lot with the simple IRAs, the 401(k)s. Quite frankly, it’s kind of a misnomer. Even though their setup is simple, they’re really not that simple. And quite frankly, if you have one in place, and you’ve made any type of contribution into that plan, let’s say you had one in place on January 1, if you’ve put dollar one in by January 3, you cannot change that plan until the next fiscal year. So, you’re somewhat stuck with those things. So, again, I don’t really deal with most simples because, A, we don’t see employers. We don’t hear a lot of employers with them and, B, when we’re talking with employers because they’re somewhat inherent in flexibility with those types of plans. We’re usually designing either 401(k)s or profit-sharing plans or some other type of plan which is going to fit them probably a little bit better. The rules are very, very fixed and very rigid. And so, that’s probably the one plan we deal with the least here simply because even though they say it’s simple, it’s really not that simple. And once it’s in place, you’re stuck for making any changes for the next fiscal year at least $1 has gone into that plan. So, quite frankly, I would say 95% of the time, there’s usually better planning options than those. 

[00:25:20] Andrew Rafal: Excellent. And, yeah, you never want to be handcuffed. You want to have as much flexibility as possible. And so, that leads into and you touched on it a little earlier but let’s talk about the 401(k) but more specifically, the solo 401(k) and how that can be incorporated for somebody who obviously solo meaning they are the only employee, how that works with the ability to put money away, have the flexibility, and then potentially have a profit-sharing on top of it and do it very cost-effectively. 

[00:25:54] Brian Hartstein: Sure. That is a really neat tool and we see that used quite a bit here, obviously, for people who are one-person companies or one-person shops. So, it’s the ability to use a solo K, a 401(k) style of plan for your own tax and retirement planning. So, we think of this in two pieces. You have what you called your salary deferral piece, in theory, how much you can defer out of your compensation. And then if you wanted to use the profit-sharing plan to put more away. So, the contribution limit for this year for the salary deferral piece for solo K is 100% of comp up to that $19,000 limit and if you’re over age 50, you can put the extra 6,000 away too. So, the difference between that and a SEP is here we can use 100% of comp as opposed to 25% of comp. So, Andrew, we might have somebody that says, “Hey, I make $90,000 a year in compensation, and with a SEP we could only put 25% away.” 

But with the salary deferral portion of a solo 401(k), we can get up to that $19,000 amount into the plan and if they wanted to put an additional amount into the plan because they might have revenue from other sources, they could put more monies into the profit-sharing plan and get up to that $56,000 limit for a 401(k) profit-sharing plan. So, it gives you a little more flexibility on the compensation side, than let’s say a SEP would. So, we see that used quite a bit for solo business owners that say, “Hey, this year I might want to put X away but next year I might want to put Y away,” because you have the flexibility to kind of move that needle up and down between literally zero and up to the compensation or the contribution limit for 401(k) profit-sharing plans. So, it gives you flexibility each year to kind of decide what you want to do, and you can go from a range from literally zero up to that $56,000 amount. The over 50 catch-up doesn’t count to that so you could probably put more away. So, we see a lot of people use that because the inherent flexibility. 

[00:27:51] Brian Hartstein: Now, we might assume it’s making a significant amount of income in their business and maybe $56,000 is kind of a drop in the bucket to them, but there’s a lot of flexibility with that type of a plan too. You know you can go anywhere from a custodian, an institutional custodian, they may have a prototype document you can use to set it up before the end of the year and the salary deferral portion you want to get in before the end of the year. If you want to make any profit-sharing plan, you can do after the close of year, but before you file a corporate return. So, they’re simple to set up and there really is no – you really don’t even need administration until you hit 250,000 of assets. 

[00:28:26] Andrew Rafal: Right. So, let me break that down for the listeners. So, you had mentioned 90,000, but let’s even the value here, the beauty here is let’s say you’ve got a side business, you’re getting 1099, and you made $30,000 and you didn’t need that $30,000. The power of being able to put away 19,000 or over 50 being able to do 25,000, it’s a home run. Here’s the other benefit too is these things can be set up as we talked about Roth 401(k)s and bigger plans, well, these can be established and set up as a solo Roth 401(k). So, although if you want to get the tax deduction, now what this is doing is allowing you as a high-income earner that’s over the limit, maybe you can’t do a Roth IRA, because you’re making over 200,000 as a couple. Now, all of a sudden, we can put 19,000 away or 25,000 into a Roth. Yes, we don’t get the deduction but now we’re growing that money inside of the Roth account, which is obviously tax-deferred. It’s tax-free later. There’s no required minimum distributions. If in the future, you roll it out to a Roth IRA, it passes to your family tax-free. 

So, it’s like it’s not the pinnacle, like the HSA, but it’s about as good as it gets. And then, Brian, you mentioned the simplicity of it. So, I know when we talk about TPA and administration, it’s verbiage that most of you guys don’t know, but a TPA is a third party administrator and in most cases, when we got 401(k) plans, we’ve got to bring them in, we’ve got to make sure that it hits the guidelines, the ERISA guidelines. So, there are costs associated with that. There’s going to be ongoing work that’s done with it. So, what Brian alluded to is that if you have less than 250,000, these solo 401(k)s are almost as simple as setting up a SEP-IRA or traditional IRA or Roth IRA. No TPA involved. Not a lot of cost. Ultimately, we use TD Ameritrade and it’s very easy for our clients to set up a solo 401(k) whether they manage it or they use us to manage it, or they use an outside person to manage it. 

[00:30:22] Andrew Rafal: But just one of the easiest ways to put money away and then being able to sprinkle on top if you wanted to do more of this profit sharing, that nice part, Brian, as you mentioned, is you don’t have to worry about it until the following year of how much you want to put away. So, it allows you to really get a hold of your cash flow your taxes, work with the CPA. So, you’ve got deadlines on the contribution part but the profit-sharing you’ve got time.

[00:30:45] Brian Hartstein: Sure. And what people don’t realize sometimes is a pension plan is actually a tax-exempt trust. It’s a trust in the same way you might have a family trust. It’s just a tax-exempt trust. So, for any plan, like a 401(k) up to some very sophisticated plans, you need a plan document that’s going to govern your plan. If you have a simple 401(k), it’s very easy to find what we call a prototype, which is kind of a generic document that you can use. Like Andrew said, you can have a TPA provide that or you could simply sometimes go to an institutional custodian, and they have documents that can be used by clients. So, really easy to implement from a document standpoint. And then, like Andrew alluded to, unless you have more than 250,000 assets in the pension plan, you don’t even have to file a tax return for that pension plan to hit that amount. So, very simple to set up, very simple to run in the beginning and a lot of flexibility to decide, “Okay, what should I put in this year based on my cash flow?” 

[00:31:41] Andrew Rafal: Awesome, and we love flexibility. That’s the key. Flexibility is the name of the game. Okay. So, now, let’s go deeper. So, now we’ve got and maybe we can use an example here. I love using examples. So, let me give you an example. One of the clients we worked with for many years, she’s in her 40s, she’s a doctor, and has a practice, has employees but making over half a million dollars a year. And prior to working with us, she was literally doing nothing for putting money away. So, Brian, what we helped her understand and this is where we never, like you said, never, “Hey, you need to do this. Here’s options. Here’s the pros, here’s the cons.” But what we were able to do for this high earner with not a lot of employees is set up the kind of the Cadillac of putting money away. And walk through what that looks like with a 401(k) profit sharing and then what we call either the cash balance planner, the defined benefit plan. Kind of talk high level of that and then we can dig in more on the details after you go through it. 

[00:32:45] Brian Hartstein: Sure. And so, one thing you kind of pointed out, but I always like to make sure that people understand is pension plans aren’t used exclusively. You can use them in combination with each other. Meaning you can have a 401(k) and a profit-sharing plan component. You could have a defined benefit pension plan by itself or you could actually put together what we call combo plans, a 401(k) profit-sharing plan with a defined benefit pension plan. So, sometimes they can work in tandem with each other, and really provide some neat tax and retirement advantages, depending upon the specifics of each client. So, again, that’s kind of the top of the pension pyramid is what we call defined benefit pension plans. They work a little differently. A 401(k) is a type of defined-contribution plan, meaning we don’t know what your ultimate benefit is going to be. You put in $1. It grows tax-deferred at whatever it earns and ultimately, whenever you go to get the money’s out, that’s what you have. So, we know what the contribution is today. We don’t ultimately know what the benefit is tomorrow. 

Defined benefit pension plans really work in the opposite. We know what benefits we might be funding for in the future and then we’re backing into the contributions today needed to provide those benefits and that’s where depending on the type of business owner in terms of their employees structure, their type of revenue, and what they want to contribute each year, where we could really put away into the six-figure range for those type of clients in utilizing that type of plan. So, they can do some really amazing tax planning, really good to retirement planning. I would say so those are the pros. So, for example, if the client that Andrew just mentioned was 50 years old and they were making at least let’s say $225,000 in salary for this year, we might be able to put away up to like $184,000, $185,000 into the defined benefit pension plan for this year. Take a tax deduction for that, have that grow tax-deferred, and build towards retirement. 

[00:34:43] Brian Hartstein: If we added the 401(k) profit-sharing plan to that, we could probably put away an extra $38,000 to get them maybe up into the $220,000 range. Now, if they have employees, we might have to provide some benefits to them, so we’ll always run some very sophisticated analysis to see what the employee cost is for doing that. But as you can see, you can really put significant dollars away for clients each year. The negative is that it’s a little more expensive in terms of doing the administration each year on the plan, having a third party administrator actually put together the tax returns for the plan itself and file those. And two, you may not be able to go all the way to zero in a year where you say, “Hey, maybe revenue wasn’t as good this year. I can’t put away that to 222. I’d like to go to zero.” You should be able to drop it but you might not be able to get all the way down to zero. You might have to put 40 or 50 or 60 away. So, you might have a much higher ceiling but you also have a floor. And so, sometimes it just depends on the revenue of the business. If it fluctuates quite a bit, those numbers may look great in theory, but it might be better to stay with a 401(k) profit-sharing plan when you can go all the way to zero.  

But if you’ve got a business that you know that has steady earnings or higher income earner that says, “No, I can project that what I’m going to make over the next four or five years,” then it might make sense to consider those higher-end plans.

[00:36:05] Andrew Rafal: Yeah. And you don’t want to look at those and not have the proper guidance and again, this is where having a trusted team, many of the CPAs today don’t really understand this world that well. So, a good advisory firm that knows this stuff will lead that charge and then once we teach the CPA, we get the blessing of the CPA, and then the other component here is usually or in all cases, we’ve got to bring in a reputable TPA firm that’s going to do the work and that’s something where a good advisory firm is the one that’s going to not just lead the charge of making sure that the plan is put in place the right way for you to defer as much as possible and know the cash flow, but then it’s kind of overseeing the work, right, Brian? Because like there’s work that the TPA comes back to the business owner or the trustee and says, “Hey, we need this each year. We need a census. We need an update.” And as business owners, we’re running around in a million different miles here. I don’t have time for that. So, having a person like Brian who can then take that work away, that is why we have the type of company plans that we do because it’s something whether it’s small business or medium or large, there’s work that got to be done. And I know you, business owners out there, you don’t have time to do all of this stuff. Now, throw in one more thing on top of it. So, is that something that you see as a value that a good advisory firm can bring to the table? 

[00:37:35] Brian Hartstein: Yeah. I’d say there’s two of the biggest mistakes in this area that I see happen, and that’s one of them, which is you might have put in place a great TPA and you’ve got your CPA working, but you don’t have anybody that’s helping what I would say quarterback the whole process. You have an advisory firm. It could be us, it could be other advisory firms that are out there, but they’re going to talk to this TPA. They’re going to talk to the CPA. They’re going to talk to the client and they’re going to keep things moving so that, A, there’s no surprises but, B, there’s work that’s being done throughout the year and if changes have to be made or can be made, you’re doing them in a proactive manner, not a reactive manner. And the second biggest mistake that I see when you’re doing this type of work with defined benefit pension plans and there’s a lot of different types, it could be cash balance, there could be traditional ones is that when it could be the CPA, could be the advisor, could even be the client. They might look at what works today. And today, it might be a wonderful solution, but what they’re not projecting out is maybe what it looks like tomorrow or three or four years down the road. 

For example, you and I work with a lot of companies that are growing. They’re doing really, really well. They’re adding employees. And so, you might have a company that’s only five employees today where this type of planning makes sense but we know and the owner knows if they’re asked the right questions that they’re going to be up to 30 and 40 employees within two or three years because the way they’re expanding. This plan in three years might not be a good fit, depending on how the employee base grows. And so, you don’t want it in place when that happens, because unfortunately, you’re going to be stuck making contributions and not being able to make changes at that point. So, you’re working from behind. So, one of the things that we like to do is project out what does the business look like today, what might it look like in three and five years. And let’s project out those numbers so that we ultimately know what that is going to look like and maybe the exposure is. And so that really, not only does it help the business owner understand how these programs work but understand what their potential cost might be. 

[00:39:29] Andrew Rafal: Yeah. And that’s the key is we can never guarantee where things are going to be. Yes, taxes are probably going to get higher and higher as we get through the Tax Cuts and Jobs Act and that’s where it’s so important, especially as a business owner. Depending upon what state you live in, if we can help defer and put money away, the fact that you can save $0.40 on the dollar in some cases, some cases like in California much more, and if rates go up, imagine having a plan that can save you $0.50, $0.60 on the dollar. So, that’s where you guys got to be proactive. You’ve got to understand that you’re working hard in your business, you’re generating cash flow, you’ve got most of the risk as a business owner is in your business. And that’s a mistake we see people make is not only the fact that it’s in their business, now they haven’t diversified. So, this is one way to diversify. It’s going to have maybe uncorrelated against your business and then if you could throw a caveat of getting some tax benefits, providing a value to your employees, and setting the stage for the long term, I mean, it’s a win-win. It’s a win-win if you look at it that way.

[00:40:39] Brian Hartstein: Sure. And one of the biggest I think unspoken advantages of any pension plan is that especially for a business owner who from the moment they open their doors in the morning or from the moment they start their business, have potential liability. It could be a physician. It could be a manufacturer. So, the nice things about pension plans is they have federal creditor protection. So, any assets that are built up in those plans are protected from creditors. So, unfortunately, we live in a very litigious society and you worry sometimes about what your assets are exposed to. Pension assets are protected. It could be a 401(k), it could be a very sophisticated defined benefit pension plan, but they’re offered federal creditor protection. So, a lot of our clients who are always worried about liability can know when they do this type of planning that they have protection of assets, and that those assets are going to be there when they’re retired. 

[00:41:29] Andrew Rafal: And you hit it on the head. A litigious society and that’s where we’re seeing more and more of these potential lawsuits coming into play, that the plan didn’t provide the lowest cost options. There may have been part of the plan that wasn’t done correctly. So, here’s the other thing, guys. If you’ve got a plan, a 401(k) plan, small, medium, large, just like you go to the doctor and you get a second opinion if something’s happening or you get your physical each year, one of the things that you should do and if it’s something that you would like us to do, we would do it at our expense is to run an analysis of your current plan to make sure that everybody is doing what they should be doing. And is there some ways to maybe edit and modify it to lower some of the costs within the plan, and then take some of the heavy lifting off of you? So that’s something I think people just get stuck in their ways, right? And it’s just like, “Hey, another year, everything’s fine,” but it’s a dangerous proposition.

[00:42:27] Brian Hartstein: Yeah. And if you’re an employer, people can be worried sometimes about what they’re doing or how they’re doing it. But a lot of times we find people just kind of put these plans in place, and they kind of go. Cost is obviously a driving factor and you want to be as efficient as possible in your plan. But the lowest cost isn’t always sometimes the most important thing. It’s about process. It’s what is your process that you have in place throughout the year each and every year to make sure you’re providing high quality, to make sure that what you’re providing is efficient, and to make sure that costs are what is called reasonable for those services being provided. And so, as an employer, nobody expects you to be perfect. What they expect you to do the Department of Labor, anybody else expects you to do is have groups that help you that make sure you, A, have process in place and that you’re following it. And from an employee standpoint, if you have concerns about what your employer is doing or not doing, those are the types of things that they need to be doing, again, to make sure that your plans are operating in the correct manner. Again, it doesn’t have to be perfect and again, cost is a factor but it’s not the ultimate factor. It’s what’s the process in place to make sure that what we have not only is up to code and falling under the rules of ERISA, but is providing things that are efficient, providing higher quality, and making sure that everything is reasonable. 

[00:43:45] Andrew Rafal: Yeah. There’s no doubt and that’s something that I think you see more and more of these payroll companies getting involved with things because it’s an easy way for them. “Hey, we’ve got the payroll. Let us do this. We’re the jack of all trades. We do HR,” and all of a sudden you’re a master of none. So, though they may be coming in trying to cut costs, at the end of the day, if they’re not making sure that your plan is protected the way Brian had mentioned, you shoot yourself in the foot. So, that’s something that sometimes you get what you pay for. Just be careful out there and make sure that you’re working with the team that knows what they’re doing. I can’t say that enough. You know, we spend our time. We love this stuff as you guys can hear the passion. We continue to educate ourselves. We do CE events for CPAs. We go to Ed Slott every year, a couple times a year and learn more and more of how we can help our clients avoid mistakes, put more money in their pocket, and make sure that there’s no ticking tax time bomb. 

So, it’s just something that I think not to say we’re better than the next guy, but it’s an anomaly to have a firm that’s really focused on that. So, doesn’t mean you have to work with us but you should be working with the firm that knows this stuff. You deserve it. Your business deserves it. Your employees deserve it. And if you have any questions, you can always reach out to us. It will be in the show notes. I think this was a great kind of high level. We can have additional shows where we can dig in on a specific item. You and I could probably talk about this stuff for the next four hours or so but the listeners will fall asleep.

[00:45:12] Brian Hartstein: Usually, I’m told to stop talking at one point. As you can tell, I could probably talk again hours and hours upon any facet of the pension planning world. So, you just tell me where and when to start and stop and I’ll do it. 

[00:45:22] Andrew Rafal: All right. Brian, well, hey, this has been awesome. We’re definitely going to have you back on. We appreciate the time, your expertise. And listeners, hope you enjoyed today. Have everything in the show notes. We’re here for you. And stay tuned later this month for a brand new episode of Your Wealth & Beyond. Happy planning, everybody. Take care. 

[00:45:42] Brian Hartstein: Thanks, and take care

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