Retirement Income

High Net Worth PF

Affluent Accredited Individuals

Business Owner-Oil & Gas

Texas Attorney Age 47

Family LP

Small Business Profile

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Living the retirement you envision begins with investing and accumulating money over the course of many years. But it doesn’t end there. To truly make the most of your retirement,

Developing Your Retirement Strategy

Below you'll find some of the financial instruments used in the retirement income planning arena.



Roth 401(k)

Roth IRA

Defined Contribution

Defined Benefit Plan





Retirement Plans

More Insurance Base Strategies

  • What Is a High-Net-Worth Individual (HNWI)?

    High-net-worth individual (HNWI) is a classification used by the financial services industry to denote an individual or a family with liquid assets above a certain figure. Although there is no precise definition of how rich someone must be to fit into this category, high net worth is generally quoted in terms of having liquid assets of a particular number. The exact amount differs by financial institution and region but could range from people with a net wealth of 6- to 7- or more figures.

    The VHNWI classification—very high-net-worth individual—can refer to someone with a net worth of at least $5 million. Ultra-high-net-worth individuals (UHNWI) are defined as people with investable assets of at least $30 million, usually excluding personal assets and property such as a primary residence, collectibles, and consumer durables.

    A high-net-worth individual classification generally qualifies for separately managed investment accounts instead of regular mutual funds. This is where the fact that different financial institutions maintain varying standards for HNWI classification comes into play. Most banks require that a customer have a certain amount in liquid assets and/or a certain amount in depository accounts with the bank to qualify for special HNWI treatment.

    The most commonly quoted figure for membership in the high-net-worth club is around $1 million in liquid financial assets. An investor with less than $1 million but more than $100,000 is considered to be “affluent” or perhaps “sub-HNWI.” The upper end of HNWI is around $5 million, at which point the client is then referred to as “very HNWI.” More than $30 million in wealth classifies a person as “ultra HNWI.”

    HNWIs are in high demand by private wealth managers. The more money a person has, the more work it takes to maintain and preserve those assets. These individuals generally demand (and can justify) personalized services in investment management, estate planning, tax planning, and so on.

    The Capgemini World Wealth Report reveals that as of 2017, the United States had the most HNWIs in the world, at more than 5.28 million, and seeing 10% growth in its HNWI population from 2016. The entire HWNI population globally grew by 11.2% in 2017.

    Moreover, 61.2% of the global HNWI population reside in four countries: the United States, Japan, Germany, and China. The major country with the largest increase in HNWI population for 2017 was India, growing 20% from 2016. South Korea had the second-best growth, with a 17% increase. North America had 31.3% of the HNWI population, and Asia-Pacific had 34.1%. Of the HNWI population in North America, the U.S. made up 96% of the continent’s HNWI population.


    Europe saw a 7.3% growth in HNWI population for 2017, with Germany growing by 7.6%. Ireland posted the highest HNWI population growth in Europe, coming in at 15.3%. Meanwhile, the HNWI population for the U.K. was just 1.2%. Sweden was the only market to jump two places in the HNWI population ranking, coming in at 23rd, and posting 14% HNWI population growth.



  • .To be an accredited investor, a person must have an annual income exceeding $200,000, or $300,000 for joint income, for the last two years with expectation of earning the same or higher income in the current year. An individual must have earned income above the thresholds either alone or with a spouse over the last two years. The income test cannot be satisfied by showing one year of an individual’s income and the next two years of joint income with a spouse. The exception to this rule is when a person is married within the period of conducting a test.

    A person is also considered an accredited investor if he has a net worth exceeding $1 million, either individually or jointly with his spouse.

    An entity is an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

    Consider an individual who earned $150,000 of individual income for the last three years and reported a primary residence value of $1 million with mortgage of $200,000, a car worth $100,000 with outstanding loan of $50,000, 401(k) account with $500,000 and a savings account with $450,000. While this individual fails the income test, he is an accredited investor according to the test on net worth, which cannot include the value of primary residence and is calculated as assets minus  liabilities. The person’s net worth is exactly $1 million, which is calculated as his assets of $1,050,000 ($100,000 plus $500,000 plus $450,000) minus a car loan of $50,000. Since he meets the net worth requirement, he qualifies to be an accredited investor.


  • The first part of developing an income strategy is determining how much money you’ll need for the retirement lifestyle you envision. The next step in your planning process will be to ascertain how, when and what will be your access strategy.

    I can’t imagine anyone looking forward to being stranded at the top of a mountain they just work so hard to climb. They knew in advance that they needed a plan to navigate their dissent before they even climbed that mountain. I also can’t imagine any retiree working hard to save and preserve money during their working years just so they can pay much of it out in taxes just a few years after retirement and be left stranded, relying primarily on Social Security to get them through their retirement years to enjoy the life style they envisioned in retirement. Thus, be mindful of the impact of income taxes can impose and affect the net spendable retirement income you will have when the smoke clears!

    Thus the components of a smart retirement income plan should encompass the following:

    1) How much net income (inflation adjusted) will you need to maintain the life style you desire in retirement?

    2) How long (how many years or for life) do you want this income to last?

    3) Are you risk adverse or do you want to favor safe money income sources? What's your risk tolerance?

    4) How much of your retirement income do you want to be free of income tax?

    5) Are their legacy concerns attached to any portion of your retirement income?

    These are the questions, once answered will help you decide on how best to design your smart retirement income strategy and ultimately your smart retirement income plan.



    Who can establish a SIMPLE IRA plan?

    Any employer (including self-employed individuals, tax-exempt organizations and governmental entities) that had no more than 100 employees with $5,000 or more in compensation during the preceding calendar year (the “100-employee limitation”) can establish a SIMPLE IRA plan. For purposes of the 100-employee limitation, you must take into account all employees employed at any time during the calendar year, including those employees who have not met the plan’s eligibility requirements (see Participation FAQs).

    If you have more than 100 employees and you’re not in a grace period (see below) for your SIMPLE IRA plan, you must correct this mistake.

    How do I establish a SIMPLE IRA plan?

    You must complete three basic steps to set up a SIMPLE IRA plan.

    1. Adopt a SIMPLE IRA plan document by signing one of these documents:
      • IRS model SIMPLE IRA plan using either
        • Form 5305-SIMPLE (if you require all contributions to be deposited initially at a designated financial institution) or
        • Form 5304-SIMPLE (if you permit each employee to choose the financial institution for receiving contributions).
      • IRS-approved prototype SIMPLE IRA plan offered by banks, insurance companies and other qualified financial institutions.
    2. Provide each eligible employee with certain information about the SIMPLE IRA plan and SIMPLE IRA where you’ll deposit employee contributions prior to the employee election period (generally, 60 days prior to January 1).
    3. Set up a SIMPLE IRA for each eligible employee using either IRS model:
      • Form 5305-S (a trust account) or
      • Form 5305-SA (a custodial account).

    You can set up SIMPLE IRAs with banks, insurance companies or other qualified financial institutions. The employee owns and controls the SIMPLE IRA.

    Is there a deadline to set up a SIMPLE IRA plan?

    You can set up a SIMPLE IRA plan effective on any date between January 1 and October 1, provided you (or any predecessor employer) didn’t previously maintain a SIMPLE IRA plan. If you’re a new employer that came into existence after October 1 of the year, you can establish the SIMPLE IRA plan as soon as administratively feasible after your business came into existence. If you previously established a SIMPLE IRA plan, you must set up a new one effective on January 1. The effective date cannot be before you actually establish the plan.

    Can I maintain my SIMPLE IRA plan on a fiscal-year basis?

    You may only maintain a SIMPLE IRA plan on a calendar-year basis.

    Is there a grace period if the plan sponsor ceases to satisfy the 100-employee limitation?

    If you previously maintained a SIMPLE IRA plan, you satisfy the 100-employee limitation for the 2 calendar years immediately following the calendar year for which you last satisfied the 100-employee limitation. There are special rules if the failure to satisfy the 100-employee limitation is due to an acquisition, disposition or similar transaction involving your business. If this is your case, see your tax advisor. Also, see the Fix It Guide – SIMPLE IRA Plan Sponsor Requirements video.

    When must the SIMPLE IRA be set up for an employee?

    A SIMPLE IRA must be set up for an employee before the first date by which you must deposit a contribution into the employee’s SIMPLE IRA.

    What if an eligible employee entitled to a contribution is unwilling or unable to set up a SIMPLE IRA?

    If an eligible employee who is entitled to a contribution under a SIMPLE IRA plan is unwilling or unable to set up a SIMPLE IRA with any financial institution prior to the date on which you must contribute to the employee’s SIMPLE IRA, you should establish a SIMPLE IRA for the employee with a financial institution that you select.

    Can I contribute to my SIMPLE IRA plan if I maintain another retirement plan?

    Generally, you can’t contribute to a SIMPLE IRA plan for a calendar year if you maintain another retirement plan and any of your employees receives an allocation or accrues a benefit under the other plan during that calendar year (the “one-plan requirement”).

    However, you can have a SIMPLE IRA plan even though you maintain another retirement plan if:

    • The other plan is only for employees covered under a collective bargaining agreement, and the SIMPLE IRA plan excludes these employees; or
    • Your business was part of an acquisition, disposition or similar transaction during the current calendar year or the 2 prior calendar years, and only your separate employees participate in the SIMPLE IRA plan.

    If you maintain another retirement plan and one of the exceptions above does not apply, you must correct this mistake.

    Do profit-sharing contributions (for a profit-sharing plan with a calendar-year plan-year) allocated for last calendar year but deposited this year prevent me from meeting the one-plan requirement?

    No, deposits made in a calendar year don’t mean that you made contributions to or accrued benefits under another retirement plan. For the SIMPLE IRA rules, you’re treated as having another plan for the year for which contributions are allocated, but not the year they’re deposited. You can set up a SIMPLE IRA plan for this year if you meet the other SIMPLE IRA plan requirementsand your employees don’t receive any allocations or accrue benefits from another plan for this year.

    If you have a non-calendar-year profit-sharing plan, you can’t have a SIMPLE IRA plan this year if your employees received plan allocations for a plan year that overlaps (begins or ends within) this calendar year.

    Do I ever need to update my SIMPLE IRA plan document?

    It’s your responsibility to ensure that you keep your plan up-to-date with current law. If you set up your plan with a prototype plan document, you should have received an amended plan document from your financial institution. If you believe the law affecting your plan has changed and you haven’t received a new plan document, contact the financial institution. If you set up your plan with an IRS Form 5304 or 5305-SIMPLE, adopt a new form when the instructions require it.

    If you haven’t updated your SIMPLE IRA plan for the most current law changes, you must correct this mistake. See video – Fix It Guide – Keeping SIMPLE IRA Plans Up-to-Date with Law Changes.

  • A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.

    • Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
    • Employers can contribute to employees’ accounts.
    • Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

  • Roth 401(k), Roth IRA, and Pre-tax 401(k) Retirement Accounts

     Designated Roth 401(k) 

     Roth IRA

     Pre-Tax 401(k) 


    Designated Roth employee elective contributions are made with after-tax dollars. Roth IRA contributions are made with after-tax dollars. Traditional, pre-tax employee elective contributions are made with before-tax dollars.

     Income Limits

    No income limitation to participate. Income limits:

    • 2019 – modified AGI married $203,000/single $137,000
    • 2018 – modified AGI married $199,000/single $135,000
    No income limitation to participate.

     Maximum Elective Contribution

    Aggregate* employee elective contributions limited to $19,000 in 2019 and $18,500 in 2018 (plus an additional $6,000 for employees age 50 or over). Contribution limited to $6,000 plus an additional $1,000 for employees age 50 or over in 2019 ($5,500 plus an additional $1,000 for employees age 50 or over in 2018). Same aggregate* limit as Designated Roth 401(k) Account

     Taxation of Withdrawals

    Withdrawals of contributions and earnings are not taxed provided it’s a qualified distribution – the account is held for at least 5 years and made:

    • On account of disability,
    • On or after death, or
    • On or after attainment of age 59½.
    Same as Designated Roth 401(k) Account and can have a qualified distribution for a first time home purchase. Withdrawals of contributions and earnings aresubject to Federal and most State income taxes.

     Required Distributions

    Distributions must begin no later than age 70½, unless still working and not a 5% owner. No requirement to start taking distributions while owner is alive. Same as Designated Roth 401(k) Account.
    * This limitation is by individual, rather than by plan. You can split your annual elective deferrals between designated Roth contributions and traditional pre-tax contributions, but your combined contributions  cannot exceed the deferral limit – $19,000 in 2019 and $18,500 in 2018 ($25,000 in 2019 and $24,500 in 2018 if you’re eligible for catch-up contributions).
  • A Roth IRA is an IRA that, except as explained below, is subject to the rules that apply to a traditional IRA.

    • You cannot deduct contributions to a Roth IRA.
    • If you satisfy the requirements, qualified distributions are tax-free.
    • You can make contributions to your Roth IRA after you reach age 70 ½.
    • You can leave amounts in your Roth IRA as long as you live.
    • The account or annuity must be designated as a Roth IRA when it is set up.

    The same combined contribution limit applies to all of your Roth and traditional IRAs.

    Limits on Roth IRA contributions based on modified AGI

    Your Roth IRA contribution might be limited based on your filing status and income.

    Additional resources

  • A defined-contribution (DC) plan is retirement plan that’s typically tax-deferred, like a 401(k) or a 403(b), in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements. The sponsor company will at times match a portion of employee contributions as an added benefit. These plans place restrictions that control when and how each employee can withdraw from these accounts without penalties.

    There is no way to know how much a defined-contribution plan will ultimately give the employee upon retiring, as contribution levels can change, and the returns on the investments may go up and down over the years.

    Defined-contribution plans accounted for $8.2 trillion of the $29.1 trillion in total retirement plan assets held in the United States as of June 19, 2019, according to the Investment Company Institute. The defined-contribution plan differs from a defined-benefit plan, also called a pension plan, which guarantees participants receive a certain benefit at a specific future date.

    Defined contribution plans take pre-tax dollars and allow them to grow in capital market investments on a tax-deferred basis. This means that income tax will ultimately be paid on withdrawals, but not until retirement age (a minimum of 59 1/2 years old, with required minimum distributions (RMD) starting at age 70½). The idea is that employees earn more money, and thus are subject to a higher tax bracket, as full-time workers and will have a lower tax bracket when they are retired. Furthermore, the money that grows inside the account is not subject to capital gains taxes.

    • Defined contribution (DC) retirement plans allow employees to invest pre-tax dollars in the capital markets where they can grow tax-deferred until retirement withdrawals.
    • 401(k) and 403(b) are two popular defined-contribution plans commonly used by companies and organizations to encourage their employees to save for retirement.
    • DC plans can be contrasted with defined benefit (DB) pensions, whereby retirement income is guaranteed by an employer. With a DC plan, there are no guarantees, and participation is both voluntary and self-directed.

    Advantages of Participating in a Defined-Contribution Plan

    Contributions made to defined-contribution plan may be tax-deferred. In traditional defined-contribution plans, contributions are tax-deferred, but withdrawals are taxable. In the Roth 401(k), the account holder makes contributions after taxes, but withdrawals are tax-free if certain qualifications are met. The tax-advantaged status of defined-contribution plans generally allow balances to grow larger over time compared to taxable accounts.

    Employer-sponsored defined-contribution plans may also receive matching contributions. More than three-fourths of companies contribute to employee 401(k) accounts based on the amount the participant contributes. The most common employer matching contribution is 50 cents per $1 contributed up to a specified percentage, but some companies match $1 for every $1 contributed up to a percentage of an employee’s salary, generally 4%-6%.

    Other features of many defined-contribution plans include automatic participant enrollment, automatic contribution increases, hardship withdrawals, loan provisions and catch-up contributions for employees age 50 and older.

    Limitations of Defined-Contribution Plans

    Defined contribution plans, like a 401(k) account, require employees to invest and manage their own money in order to save up enough for retirement income later in life. Employees may not be financially savvy and perhaps have no other experience investing in stocks, bonds, and other asset classes. This means that some individuals may invest in improper portfolios, for instance over investing in their own company’s stock rather than a well-diversified portfolio of various asset class indices. Defined benefit (DB) pension plans, in contrast to DC plans, are professional managed and guarantee retirement income for life from the employer as an annuity. DC plans have no such guarantees, and many workers, even if they have a well-diversified portfolio, are not putting enough away on a regular basis and so will find that they do not have enough funds to last through retirement.

    The average 401(k) balance of Americans aged 50-59 in Q1 of 2019, according to Fidelity. A retiree withdrawing 5% a year would earn just $8,700 annually; and that’s before taxes.


    Other Defined-Contribution Plan Examples

    The 401(k) is perhaps most synonymous with the defined-contribution plan, but there are many other plan options. The 401(k) plan is available to employees of public corporations and businesses. The 403(b) plan is typically available to employees of nonprofit corporations, such as schools. 457 plans are available to employees of certain types of nonprofit businesses, as well as state and municipal employees. The Thrift Savings Plan is used for federal government employees. As of Dec. 31, 2015, roughly $2 trillion in assets were held in non-401(k) account types. 529 plans are used to fund a child’s college education.

  • A defined-benefit plan is an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. The company administers portfolio management and investment risk for the plan. There are also restrictions on when and by what method an employee can withdraw funds without penalties.

    Defined-benefit plans, aka pension plans or qualified-benefit plans, are termed “defined” because employees and employers know the formula for calculating retirement benefits ahead of time. This fund is different from other pension funds, where the payout amounts depend on investment returns, and if poor returns result in a funding shortfall, employers must tap into the company’s earnings to make up the difference.


    Since the employer is responsible for making investment decisions and managing the plan’s investments, the employer assumes all the investment risk. A tax-qualified benefit plan has the same characteristics as a pension plan, but it also gives the employer and beneficiaries additional tax incentives not available under non-qualified plans.


    A defined-benefit plan guarantees a specific benefit or payout upon retirement. The employer may opt for a fixed benefit or one calculated according to a formula that factors in years of service, age and average salary. The employer typically funds the plan by contributing a regular amount, usually a percentage of the employee’s pay, into a tax-deferred account. However, depending on the plan, employees may also make contributions.


    Upon retirement, the plan may pay out in monthly payments throughout the employee’s lifetime or as a lump-sum payment. For example, a plan for a retiree with 30 years of service at retirement may state the benefit as an exact dollar amount, such as $150 per month per year of the employee’s service. This plan would pay the employee $4,500 per month in retirement. If the employee dies, some plans distribute any remaining benefits to the employee’s beneficiaries.


    Payment options commonly include a single-life annuity, which provides a fixed monthly benefit until death; a qualified joint and survivor annuity, which offers a fixed monthly benefit until death and allows the surviving spouse to continue receiving benefits until death; or a lump-sum payment, which pays the entire value of the plan in a single payment. Selecting the right payment option is important because it can affect the benefit amount the employee receives. It is best to discuss benefit options with a financial advisor.

    Working an additional year increases the employee’s benefits, as it increases the years of service used in the benefit formula. This extra year may also increase the final salary the employer uses to calculate the benefit. In addition, there may be a stipulation that says working past the plan’s normal retirement age automatically increases an employee’s benefits.

  • A simplified employee pension (SEP, or SEP IRA) is a retirement plan that an employer or self-employed individuals can establish. The employer is allowed a tax deduction for contributions made to the SEP plan and makes contributions to each eligible employee’s SEP IRA on a discretionary basis.

    SEP IRAs often have higher annual contribution limits than standard IRAs. Fundamentally, a SEP IRA can be considered a traditional IRA with the ability to receive employer contributions. One major benefit it offers employees is that employer contributions are vested immediately.

    A SEP IRA is an attractive option for many business owners because it does not come with many of the start-up and operating costs of most conventional employer-sponsored retirement plans. Many employers also set up a SEP plan to contribute to their own retirement at higher levels than a traditional IRA allows. Small organizations favor SEP plans because of eligibility requirements for contributors, including minimum age of 21, at least three years of employment and a $600 compensation minimum. In addition, an SEP IRA allows employers to skip contributions during years when business is down.

    SEP IRA accounts are treated like traditional IRAs for tax purposes and allow the same investment options. The same transfer and rollover rules that apply to traditional IRAs also apply to SEP IRAs. When an employer makes contributions to SEP IRA accounts, it receives a tax deduction for the amount contributed. Additionally, the business is not “locked in” to an annual contribution – decisions about whether to contribute and how much can change each year.

    The employer is not responsible for making investment decisions. Instead, the IRA trustee determines eligible investments and the individual employee account owners make specific investment decisions. The trustee also deposits contributions, sends annual statements and files all required documents with the IRS.

    Contributions to simplified employee pension (SEP) IRAs are immediately 100 percent vested, and the IRA owner directs the investments. An eligible employee (including the business owner) who participates in his or her employer’s SEP plan must establish a traditional IRA to which the employer will deposit SEP contributions. Some financial institutions require the traditional IRA to be labeled as a SEP IRA before they will allow the account to receive SEP contributions. Others will allow SEP contributions to be deposited to a traditional IRA regardless of whether the IRA is labeled as a SEP IRA.

    • A simplified employee pension (SEP, or SEP IRA) is a retirement plan that an employer or self-employed individuals can establish.
    • SEP IRAs are mostly used by small businesses and self-employed individuals to meet their retirement savings needs.
    • SEP IRAs often have higher annual contribution limits than standard IRAs.

    Rules for SEP IRAs

    Contributions made by employers cannot exceed the lesser of 25 percent of an employee’s compensation, or $56,000 maximum for 2019 (Up from $55,000 in 2018). As with the traditional IRA, withdrawals from SEP IRAs in retirement are taxed as ordinary income. When a business is a sole proprietorship, the employee/owner both pays themselves wages and may also make a SEP contribution, which is limited to 25 percent of wages (or profits) minus the SEP contribution. For a particular contribution rate CR, the reduced rate is CR/(1+CR); for a 25 percent contribution rate, this yields a 20 percent reduced rate, as in the above.

    Because the funding vehicle for a SEP plan is a traditional IRA, SEP contributions, once deposited, become traditional IRA assets and are subject to many of the traditional IRA rules, including the following:

    • Distribution rules
    • Investment rules
    • Contribution and deduction rules for traditional IRA contributions. These apply to the employee’s regular IRA contributions, not the SEP employer contributions.
    • Documentation requirements for establishing an IRA. In addition to the documents required for establishing a SEP plan (discussed later), each SEP IRA must meet the documentation requirement for a traditional IRA.

    Limitations for SEP IRAs


    Not all businesses can start SEP IRAs, which were primarily designed to encourage retirement benefits among businesses that would otherwise not set up employer-sponsored plans. Sole proprietors, partnerships and corporations can establish SEPs. Too high of an income can be a limitation – the 2019 eligible compensation limit is $280,000 (up from $275,000 in 2018). Unlike qualified retirement plans – under which participants, including the business owner, may borrow up to the lesser of 50% or $50,000 of their vested balance – the SEP does not have this feature.

    Moreover, certain types of employees may be excluded by their employer from participating in a SEP IRA, even if they would otherwise be eligible based on the plan’s rules. For example, workers who are covered in a union agreement that bargains for retirement benefits can be excluded. Workers who are nonresident aliens can also be excluded as long as they do not receive U.S. wages or other service compensation from the employer.

    SEP contributions and earnings are held in SEP-IRAs and can be withdrawn at any time, subject to the general limitations imposed on Traditional IRAs. A withdrawal is taxable in the year received. If a participant makes a withdrawal before age 59½, generally a 10 percent additional tax applies. SEP contributions and earnings may be rolled over tax-free to other Individual retirement account and retirement plans. SEP contributions and earnings must eventually be distributed following the IRA required IRA required minimum distributions

  • A supplemental executive retirement plan is a non-qualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans. There are many different kinds of SERPs available to companies wishing to ensure their key employees are able to maintain their current standards of living in retirement.

    Understanding Supplemental Executive Retirement Plan (SERP)

    A SERP is a form of deferred-compensation plan corporations often use as a way to reward and retain key executives. Because SERPs are non-qualified, they may be offered selectively to high-earning executives whose qualified plan contributions are limited by top-heavy rules. The company and executive enter into a formal agreement that promises the executive a certain amount of supplemental retirement income based on vesting and other eligibility conditions the executive must meet. The company funds the plan out of current cash flows or through the funding of a cash-value life insurance policy, and the deferred benefits are not currently taxable to the executive. Upon retirement, the executive receives the income, which the IRS and state taxes as ordinary income.

    Advantages of a Supplemental Executive Retirement Plan

    Supplemental executive retirement plans are viable options for companies seeking to maximize key executives’ retirement income. They are non-qualified and require no IRS approval and minimal reporting. The company controls the plan and is able to book an annual expense equal to the present value of the stream of future benefit payments.

    When the benefits are paid, the company is able to deduct them as an expense. When a cash-value life insurance policy is used to fund the benefits, the company benefits from tax-deferred accumulation inside the policy. In most cases, the policy can be structured in a way that allows the company to recover its cost.

    For executives, the plan can be tailored to meet their specific needs. The benefits accrue to the executive without any current tax consequences. When funded with a cash-value life insurance policy, the death benefits are available to provide a continued supplemental payment or a lump-sum payment to the executive’s beneficiaries in the event of a premature death.

    Disadvantages of a Supplemental Executive Retirement Plan

    When funding a SERP, the company does not receive an immediate tax deduction on any payments. The funds that accumulate for a SERP inside a life insurance policy are not protected from creditor claims against the company or company insolvency. The IRS may also decide benefits available to the employee after retirement putting them at the risk of substantial payment.


    • A SERP is a non-qualified retirement plan offered to executives as a long term incentive to stay with the company.
    • SERPs offer tax advantages to companies and offer executives the chance to earn benefits of up to 70 percent of their pre-retirement income. But the tax benefits that accrue to the company and employee are not immediate.


    Example of a SERP


    A SERP generally takes on the form of a cash value life insurance policy. Companies buy an insurance policy of an agreed-upon amount for the employee. The company gets tax benefits because it pays the premiums on the insurance. Even if the employee quits, the company still has access to the insurance’s cash value. If the employee passes away, the company is a beneficiary of the payout and also gets tax benefits.

  • 457 plans are non-qualifiedtax-advantaged, deferred compensation retirement plans offered by state, local government and some nonprofit employers. Eligible participants are able to make salary deferral contributions, depositing pre-tax money that is allowed to compound without being taxed until it is withdrawn.

    How a 457 Plans Works

    457 plans are similar in nature to 401(k) plans, only rather than being offered to employees at for-profit companies, they cater to state and local public workers, together with highly paid executives at certain nonprofit organizations, such as charities.

    Participants of these defined contribution plans set aside a percentage of their salary for retirement. These funds are transferred to the retirement account, where they grow in value without being taxed.

    There are two types of 457 plans:

    • 457(b): This is the most common 457 plan and is offered to state and local government employees.
    • 457(f): A plan offered to highly compensated government and select non-government employees. (To learn more about lesser-known retirement plans, see: 5 Lesser-Known Retirement Plans and Benefit Plans.)

    Employees are allowed to contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year. If the plan does not meet statutory requirements, the assets may be subject to different rules.


    • 457 plans are IRS-sanctioned, tax-advantaged employee retirement plans.
    • They are offered by state, local government and some nonprofit employers.
    • Participants are allowed to contribute up to 100% of their salary, provided it does not exceed the applicable dollar limit for the year.
    • Any interest and earnings generated from the plan do not get taxed until the funds are withdrawn.

    457(b) Plan Contributions

    As of 2019, employees can contribute up to $19,000 per year, a slight increase on the 2018 limit of $18,500. In some cases, workers are able to contribute even more.

    For example, if an employer permits catch-up contributions, workers over the age of 50 may contribute an additional $6,000, making their maximum contribution limit $25,000 ($19,000 + $6,000).

    457(b) plans also feature a “Double Limit Catch-up” provision. This is designed to allow participants who are nearing retirement to compensate for years in which they did not contribute to the plan but were eligible to do so. In this case, employees who are within three years of retirement age (as specified in their plan), may contribute $38,000, twice the annual contribution limit.

    In certain circumstances, a 457 plan participant may be able to contribute as much as $38,000 to his or her plan in one year.

    A lesser-known feature of the 457(b) plan is that the Internal Revenue Service (IRS) also allows unused contribution rollovers for employees who are not using the age 50 or over catch-up option. For example, if an employee contributes $12,000 to his or her 457(b) plan in year 1, the maximum contribution limit for year 2 is $26,000 ($7,000 + $19,000).

    457 plans are taxed as income similar to a 401(k) or 403(b) when distributions are taken. The only difference is there are no withdraw penalties and that they are the only plans without early withdraw penalties. But you also have the option of rolling the assets in an IRA rollover. This way, you can better control distributions and only take them when needed. So, if you take the entire amount as a lump-sum, the entire amount is added into your income and may push you into a higher tax bracket. With the rollover route, you could take out a little this year,, and so on as needed, thus controlling your taxes better. And while it remains inside the IRA, it continues to grow tax-deferred and is protected from creditors.

    Advantages of a 457(b) Plan

    Contributions are taken from paychecks on a pre-tax basis, resulting in lower taxable income. For example, if Tim was earning $4,000 per month and contributing $700 to his 457(b) plan, his taxable income for the month is $3,300.

    Employees also have the option to invest their contributions in a selection of mutual funds. Importantly, any interest and earnings generated from these vehicles do not get taxed until the funds are withdrawn. Moreover, if an employee resigns, or retires early and needs to withdraw his or her funds, there is no 10% penalty fee, unlike 401(k) and 403(b) plans.

    Limitations of a 457(b) Plan

    Employer matched contributions count toward the maximum contribution limit. For instance, if an employer contributes $10,000 to the plan, the employee can only add $9,000 until the $19,000 contribution limit is reached (unless he or she is permitted to use the catch-up option). In practice, most government employers do not offer contribution matching.

  • IRC 403(b) Tax-Sheltered Annuity Plans – Overview of the 403(b) Final Regulations

    On July 23, 2007, the first comprehensive regulations in 43 years were issued (published July 26, 2007). The regulations package reaches out beyond 403(b) to also provide guidance on 414(c) common control for certain tax-exempt organizations.

    The general effective date is for taxable years beginning after December 31, 2008, with some notable exceptions. The portion of the regulations dealing with the grandfathering of incidental life insurance contracts applies to contracts issued up to 60 days after the publication date. Similarly, the new in-service contract exchange rules do not apply to a contract received in an exchange that occurred on or before 60 days after the publication date. Churches sponsoring 403(b)s and collectively bargained situations may experience a later effective date.

    So let’s explore the highlights of the regulations:

    Existing IRS positions that have been acknowledged:

    • 403(b)s that provide for vesting.
    • Age 50 catch-up applies only after the 402(g)(1) (employee elective deferral limits) and 402(g)(7) (15 years-of-service catch-up) dollar limitations.
    • The nonelective nature of post-severance contributions (up to 5 years).
    • Meaningful notice is needed to satisfy universal availability for salary reduction contributions.
    • Hardship distributions follow the 401(k) rules.

    Brand new highlights:

    • Requirement that a 403(b) program be maintained pursuant to a written defined contribution plan which satisfies 403(b) in both form and operation and contains all the terms and conditions for eligibility, limitations, and benefits under the plan.
    • Elective deferrals for 403(b) and 402(g) purposes are limited to contributions under a cash or deferred election as defined under 401(k).
    • The good faith reasonable standard of Notice 89-23 for nonelective nondiscrimination is no longer maintained.
    • Non-grandfathered contracts not subject to distribution restrictions may offer distributions only after severance of employment or upon the occurrence of an event such as after a fixed number of years, the attainment of a stated age under the plan or disability.

    Additionally, the regulations provide that:

    • Contribution amounts (in non-ERISA plans) must be transferred to providers within a period no longer than is reasonable for proper plan administration, such as transferring elective deferrals within 15 business days following the month in which these amounts would have been paid to the participant.
    • Incidental life insurance, unless grandfathered, may not be part of a 403(b) plan.
    • These plans may terminate and distribute assets with full rollover ability, as well as recognize the occurrence of an employment severance where an employee no longer works for an employer eligible to maintain a 403(b).
    • In-service, plan-to-plan 403(b) asset transfers are limited to situations where the participant is an employee or former employee of the employer sponsoring the receiving plan.
    • Church 403(b)(9) retirement income accounts will be expected to be maintained pursuant to a written plan which affirmatively states the intent to be a retirement income account.

    Finally, the 414(c) regulation addresses aggregation to determine the employer for control group benefit purposes for all exempt organizations (not governments), except churches, based upon an 80% director or trustee common control test.

    So, welcome to a new world for 403(b).

  • There are several types of permanent life insurance policies. The primary differences between these policies have to do with how premiums are paid and how the cash value grows over time.

    Permanent Life Policy Premiums Cash Value Growth
    Whole Life Insurance Level for length of policy. Grows at a guaranteed rate.
    Universal Life Insurance Maximum and minimum premiums are set, but you can pay any amount between these. You can also pay premiums by using the policy’s cash value. Grows based upon performance of the market, though there’s a guaranteed minimum annual return.
    Variable Life Insurance Premiums can be level or vary, depending on the policy. You choose how to invest the cash value from a set of options which are similar to mutual funds.
    Indexed Universal Life Insurance Maximum and minimum premiums are set, but you can pay any amount between these. You can also pay premiums using the policy’s cash value. Grows based upon the performance of an index, such as the S&P 500, though there are caps on annual returns. There’s also a guaranteed minimum annual return.
    Variable Universal Life Insurance Maximum and minimum premiums are set, but you can pay any amount between these. You can also pay premiums using the policy’s cash value. You choose how to invest the cash value from a set of options which are similar to mutual funds.
    Guaranteed Universal Life Insurance Level for length of policy. Typically little to no cash value component.

    Since there’s little cash value component to it, guaranteed universal life insurance is typically the best option if you’re interested in permanent coverage without an investment component. While guaranteed universal policies are still much more expensive than term policies, they’re usually the cheapest way to buy permanent life insurance.

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  • Guaranteed income

    Many people want a certain amount of their retirement income to be dependable and predictable. Some pension plans offer defined benefits that guarantee monthly income for life. Social Security is another source of guaranteed income, although the amount you receive in Social Security each month depends on your earning history and marital status, as well as when you begin taking the benefit.

    Annuities offer another way to put a floor under your retirement income, providing an income stream in exchange for an initial investment. Immediate annuities begin issuing payments soon after you make your investment, while deferred annuities are invested for a period of time before you start taking withdrawals.

    You can also choose between fixed (-rate) and variable annuities. Fixed annuities earn a guaranteed interest rate over time, while variable annuities are tied to the performance of an investment portfolio. Fixed annuities provide more certainty, but variable annuities offer more growth opportunity. Both provide monthly income for life and protection for your loved ones through a death benefit.

    Annuities do have some limitations. For example, because they’re designed for retirement savings, you may be charged penalties if you take out your money early. For example, if you take withdrawals before age 59½, you may pay a 10 percent federal tax in addition to ordinary income taxes. Consult your tax professional regarding your unique situation.

    Nonguaranteed income sources

    Any source of income affected by forces outside of your control, such as inflation or the changing stock market, is considered nonguaranteed. Even low-risk investments like bonds come with some uncertainty, since their prices can be affected by changing interest rates and other factors. Meanwhile, higher-risk investments like stocks are subject to more dramatic fluctuations. The amount you can withdraw from your retirement portfolio depends to some degree on the performance of the investment products you own.

    That said, you can make some assumptions about your ability to draw income from your retirement savings. Many experts recommend a 3 to 4 percent annual withdrawal strategy as a way to sustain your savings over your lifetime, potentially adjusting the amount based on market performance. For instance, in the year following a down market, you might withdraw only 3 percent of your portfolio’s assets, whereas 4 percent might make sense under better market conditions. Of course, there is no guarantee that this strategy will meet your income needs in full.

    Refining your strategy

    The most successful retirement income plans involve ensuring that you have enough money each year to cover your expenses comfortably while allowing other investments to grow. The combination of strategies and products that is right for you depends on how much you’ve saved, your life expectancy and your desired retirement lifestyle. Your financial professional can help you develop a sustainable income strategy that makes sense for your goals and situation.