Devoted to understanding the basics and fundamentals of investing

ACCELERATING RETIREMENT PLANNING:
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FASTER WAYS TO BUILD A RETIREMENT FUND
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Most retirement books and advisors tell you to start retirement planning around age 45 or 50. They say start building a retirement fund while still in your twenties. The reality is that most people do not focus on meeting their retirement needs until college tuition, the mortgage, and other expenses are met. Then they can think about paying for their retirement years. When you wait until your fifties to seriously start building retirement funds, it helps to look for special tax-advantaged ways to make the fund grow faster. You want to maximize use of company pensions, 401(k)s, IRAs, and whatever else is available. But you might look for ways to supplement these plans. Pensions and 401(k)s are known as qualified retirement plans. They get special tax treatment if the employer provides them to a cross-section of employees, limits benefits, and follows other rules. If these plans are not providing enough money for you, consider a nonqualified retirement plan. One form of non-qualified plan is known as an excess benefit plan because it is offered in addition to a qualified plan. It is also called a top hat plan. Another type of nonqualified plan is called a supplemental employee retirement plan (SERP) and might not be used with a qualified plan. Both of these plans have a number of common features. An important feature to you is that they provide retirement benefits that exceed those allowed under a qualified retirement plan. The plans also are generally offered only to certain employees. The company does not have to provide the benefits to all employees. Under these plans, the employer promises to pay you a certain amount of retirement benefits in the future. This promise might be funded only by a promise to pay, a trust, an escrow agreement, a third-party guarantee, or corporate-owned life insurance. Each of these types of agreements have met IRS approval in the past, but the IRS says it no longer will issue rulings on third-party letters of credit or surety bonds. To avoid current taxation on the benefits, you must be at some risk of losing the benefits before retirement. The plan can be set up so that your only real risk is if the employer declares bankruptcy. If you meet IRS requirements, you have income taxes only when the benefits are received. The employer does not get a deduction until you recognize income. If the employer actually funds a trust or separate account before retirement, then the employer is treated as owner of the funds and taxed on the annual income. These taxes can be avoided if the trust or account is funded with municipal bonds, life insurance, or annuities.

Special 401(k) Plan
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If your employer is willing to help you build a retirement fund, but does not want to put in additional money, maybe a wraparound, or non-qualified 401(k) plan can be established. In a wraparound 401(k), the employer selects key employees and decided how much they can be allowed to defer and what the matching contributions will be. The employer also decides how the accounts will be invested. As with the nonqualified plan, the wraparound 401(k) is not taxed to the employee as long as there is some risk of forfeiture due to corporate bankruptcy or other disaster. It can be set up with a trust or other arrangement. The employer gets a deduction when the employee recognized income. Since the plan is nonqualified, the employer has great flexibility in structuring the details of the plan. If you are off to a late start in accumulating retirement funds, your first step should be to change your compensation arrangement. By turning part of your salary or future salary increases into deferred compensation, you will get a tax deferral benefit that will help the fund grow faster.