The Question of “Optional”
01-30-2020 | 10:08 AM
#51
Gets Weekends Off
Joined: Sep 2014
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I do contribute money to my 401k. However, I don't cede control over how much to put there vs into other investments. I definitely don't let the company or ALPA decide how much of my income they will scrape into an investment vehicle.
01-30-2020 | 10:11 AM
#52
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Joined: Jun 2015
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01-30-2020 | 10:26 AM
#54
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Joined: Oct 2014
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You’re making this way more complicated than it is. The MBCBP is simply another tax deferred vehicle to save money. There is compound growth on the money that goes into the MBCBP.
Do you contribute money to your 401K? If they increase the amount you can contribute to your 401K do you allow more money to go into it?
Do you contribute money to your 401K? If they increase the amount you can contribute to your 401K do you allow more money to go into it?
Your answers indicate that you don’t understand the concept. There’s no benefit or compounded growth on deferred taxes. Your after tax money doesn’t change if the marginal rate doesn’t. Any extra growth on the money that is deferred is taken away when you pay taxes at withdrawal.
Yes I do, and yes I would if the cap was raised. But that’s money that I control and can invest where I want while controlling expenses. And there is a point at which I would stop deferring taxes even if there was no cap, as eventually RMDs would force your retirement tax bracket to be the same as when you are working.
01-30-2020 | 10:30 AM
#55
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Joined: Oct 2014
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When this plan first was floated I did a lot of external reading, particularly on the ICR.
Here’s one in particular concerning “underfunded due to low market rate of return”.
https://www.manning-napier.com/insig...ce-plan-assets
“When all other variables are held constant, to the extent that the actual plan assets earn more than the plan’s ICR the plan can become over-funded, causing subsequent contributions to decrease. When the actual plan assets earn less than the plan’s ICR the plan can become under-funded causing subsequent contributions to increase. Note that certain actuarial, census and demographic changes can also affect the plan contributions.”
Note all the allowable ICRs:
”
In searching for some of those articles I just came across this. It seems some of those articles may have been narrow in scope pertaining to the internal crediting rate. My apologies for misunderstanding today’s rules.
https://www.cashbalancedesign.com/plan-investments/
”Thanks to IRS regulations introduced in 2010, plan sponsors can set the ICR to equal the “Actual Rate of Return,” or yield, on plan assets. Rather than striving each year to ensure that investments achieve a targeted interest rate, the actual return itself is the ICR. Th is option can substantially reduce investment risk and allow for more predictable annual contributions.Prior to the 2010 regulations, plan sponsors using safe harbor rates faced challenges if the investment returns either fell short or exceeded the targeted ICR. Additional contributions were required in the case of underfunding, and if returns were too high, contributions tended to be lower due to the surplus of assets. In this case, the tax deduction could be lower and contributions were less consistent.”
Here’s one in particular concerning “underfunded due to low market rate of return”.
https://www.manning-napier.com/insig...ce-plan-assets
“When all other variables are held constant, to the extent that the actual plan assets earn more than the plan’s ICR the plan can become over-funded, causing subsequent contributions to decrease. When the actual plan assets earn less than the plan’s ICR the plan can become under-funded causing subsequent contributions to increase. Note that certain actuarial, census and demographic changes can also affect the plan contributions.”
Note all the allowable ICRs:
”
- Segment Rates—the first, second, or third segment rate described in Internal Revenue Code §417(e)(3) or §430(h)(2)(C);
- Cost-of-Living Index—indices equal to the rate of increase on an eligible cost-of-living index described in Treasury regulation §1.401(a)(9)-6, A-14(b);
- Annuity Contract Rates—the rate of return for an annuity contract issued to an employee by a licensed insurance company;
- Rate of Return on a Regulated Investment Company—the rate of return on a regulated investment company (e.g., a mutual fund) as defined in Internal Revenue Code §851, that is reasonably expected to be not significantly more volatile than a broad US or international equities market;
- Bond Index Rates—rates equal to the sum of a bond interest rate and any associated margin;
- Fixed Rate of Interest—for example, “4.5%”; and
- Actual Rate of Return—the actual rate of return on plan assets, so long as they are diversified sufficiently to minimize volatility.”
In searching for some of those articles I just came across this. It seems some of those articles may have been narrow in scope pertaining to the internal crediting rate. My apologies for misunderstanding today’s rules.
https://www.cashbalancedesign.com/plan-investments/
”Thanks to IRS regulations introduced in 2010, plan sponsors can set the ICR to equal the “Actual Rate of Return,” or yield, on plan assets. Rather than striving each year to ensure that investments achieve a targeted interest rate, the actual return itself is the ICR. Th is option can substantially reduce investment risk and allow for more predictable annual contributions.Prior to the 2010 regulations, plan sponsors using safe harbor rates faced challenges if the investment returns either fell short or exceeded the targeted ICR. Additional contributions were required in the case of underfunding, and if returns were too high, contributions tended to be lower due to the surplus of assets. In this case, the tax deduction could be lower and contributions were less consistent.”
All the more reason we need more info. It would be nice if this applied because if actually is a guaranteed X% return that changes everything.
01-30-2020 | 11:08 AM
#56
Gets Weekends Off
Joined: May 2012
Posts: 1,418
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Your answers indicate that you don’t understand the concept. There’s no benefit or compounded growth on deferred taxes. Your after tax money doesn’t change if the marginal rate doesn’t. Any extra growth on the money that is deferred is taken away when you pay taxes at withdrawal.
Yes I do, and yes I would if the cap was raised. But that’s money that I control and can invest where I want while controlling expenses. And there is a point at which I would stop deferring taxes even if there was no cap, as eventually RMDs would force your retirement tax bracket to be the same as when you are working.
Yes I do, and yes I would if the cap was raised. But that’s money that I control and can invest where I want while controlling expenses. And there is a point at which I would stop deferring taxes even if there was no cap, as eventually RMDs would force your retirement tax bracket to be the same as when you are working.
Why do the top 0.1% defer and avoid taxes? Because there is no benefit?
Yes, there might be a threshold where RMDs and rates would make deferring taxes less
attractive but most people are far from that limit.
01-30-2020 | 11:30 AM
#57
Gets Weekends Off
Joined: Dec 2007
Posts: 6,155
Likes: 215
If the administrator takes a high 1% but I save 10% tax, I’m interested to learn more.
My 401K contribution is maxed out. There is no more room in it for tax sheltering safe or unsafe money.
Im still undecided about the cash balance plan. I need more information and specific examples before I make up my mind.
My 401K contribution is maxed out. There is no more room in it for tax sheltering safe or unsafe money.
Im still undecided about the cash balance plan. I need more information and specific examples before I make up my mind.
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01-30-2020 | 11:31 AM
#58
Gets Weekends Off
Joined: Dec 2007
Posts: 6,155
Likes: 215
You are contradicting yourself. Lets make it simple. If there is no tax advantaged reason to put money into a MCPCP why do you put it into a 401K as you do? Why would you increase money into a 401K and not put money in a MBCBP?
Why do the top 0.1% defer and avoid taxes? Because there is no benefit?
Yes, there might be a threshold where RMDs and rates would make deferring taxes less
attractive but most people are far from that limit.
Why do the top 0.1% defer and avoid taxes? Because there is no benefit?
Yes, there might be a threshold where RMDs and rates would make deferring taxes less
attractive but most people are far from that limit.
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01-30-2020 | 11:36 AM
#59
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Joined: Oct 2014
Posts: 1,015
Likes: 13
You are contradicting yourself. Lets make it simple. If there is no tax advantaged reason to put money into a MCPCP why do you put it into a 401K as you do? Why would you increase money into a 401K and not put money in a MBCBP?
Why do the top 0.1% defer and avoid taxes? Because there is no benefit?
Yes, there might be a threshold where RMDs and rates would make deferring taxes less
attractive but most people are far from that limit.
Why do the top 0.1% defer and avoid taxes? Because there is no benefit?
Yes, there might be a threshold where RMDs and rates would make deferring taxes less
attractive but most people are far from that limit.
Because until your expected tax bracket in retirement is the same or higher than your current tax bracket, there is an advantage. At some point because of RMDs, other income, or your predictions of future tax policy the advantage disappears and becomes a disadvantage.
In your 70s, RMDs ranger from 3.6% to 5.1%. At age 75 it’s 4.37. For someone currently in the 24% bracket you would need a balance of less than $3.8 million to benefit (and that doesn’t include social security or other taxable income). Not hard to do for people with full careers of 401ks. And the numbers get worse as you age.
As for your insistence that there is a compounding benefit. If you invested 10k pretax, after 20 years of 8% growth it will be worth $49,268. If you pay 24% on that you are left with $37,443. If you paid up front 24%, you have $7600. After 20 years of 8% growth that’s worth the same, $37,443. Deferring taxes only helps if the taxes you pay are lower.
01-30-2020 | 11:46 AM
#60
Trimming my beard
Joined: Jul 2014
Posts: 241
Likes: 0
From: 7ERB
The Question of “Optional”
I think another important piece of this is that many of those availing themselves of the MBCB plans are small business owners, like physicians and attorneys. They offer this brand of defined benefit plan to all of their business’s employees, including themselves. They get the tax benefits (whatever they end up being) and the business accrues any excess earnings from the plan’s investments. If the investments outperform the ROI target, the excesses accrue to the owners—themselves.
We are in a different situation as non-owner employees.
Edited because I didn’t spellcheck before submitting.
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Last edited by SparkySmith; 01-30-2020 at 12:04 PM.
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