Interested in a retirement plan with higher limits than a 401(k) and profit-sharing plan? If so, a DR-VIP plan may be for you. A DR-VIP plan is a qualified retirement plan designed for business owners and professionals who seek high deductible contributions in excess of the defined contribution plan limits. The plan combines the best features of defined contribution plans and defined benefit plans.
Listen to Chris Lewis, a Tax Partner in the Firm’s Private Client Services group and Mark Maund, a Senior Financial Advisor in Choreo (formerly Cherry Bekaert Wealth Management LLC), as they discuss the attributes of Direct Recognition Variable Investment Plans.
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CHRIS LEWIS: Good morning. My name is Chris Lewis. I'm a partner with Cherry Bekaert Private Client Service Group in Augusta, Georgia. I'm here with Mark Maund, Senior Advisor with our Wealth Management Group, also in Augusta. Mark, thank you for joining me this morning.
MARK MAUND: Absolutely. Good to see you, Chris.
CHRIS LEWIS: As business owners or individuals look for retirement plan options to start or increase savings, some plans are widely known, such as 401(k) plans, SEP IRAs, or SIMPLE IRAs. There's also a unique option called a VIP plan. Would you give us more information about that?
MARK MAUND: We work in retirement planning as part of wealth management because most people want to have enough to retire and to take advantage of tax laws. As a business owner, you want to help your employees have a retirement that provides more than Social Security.
MARK MAUND: There are two broad types of retirement plans. Defined contribution plans include 401(k)s, IRAs, SEP IRAs, SIMPLE IRAs, and profit-sharing plans; they define what goes into the plan but not what comes out. The other type is the traditional pension, where the benefit to be paid at retirement defines what must go into the plan; we call this a defined benefit plan.
MARK MAUND: When clients want to maximize retirement savings, we typically see this with business owners, doctors, lawyers, professionals, CPAs, and engineers who have an owner-to-employee ratio of about one to eight or one to ten. These are often people in midlife, around 50 years old, who have supported family education and focused on growing their business or practice.
CHRIS LEWIS: So the ideal candidate isn't a younger business owner; it's someone around 50 or older.
MARK MAUND: Yes. The benefit in a defined benefit plan is calculated based on years until retirement age, typically 65. The fewer years until retirement, the more you can contribute because you're funding what will be paid out. The IRS sets limits related to compensation, but the basic idea is the closer you are to retirement, the higher the allowable contributions.
MARK MAUND: For example, if you're 50 or older, you can personally contribute about $26,000 a year to a 401(k). From the employer side, you can add roughly $38,000 and some change, for a total around $64,500. Those limits can be restrictive for higher earners.
MARK MAUND: Congress recognized that people earning above the Social Security maximum, which this year is $142,800, needed ways to save more for retirement. For those individuals, contributions can be much higher. In some cases, you could contribute upwards of $300,000 a year.
MARK MAUND: The type of defined benefit plan that provides this opportunity is commonly called a cash balance defined benefit plan. It differs from a traditional defined benefit plan and, with VIP treatment, allows you to set the amount you want to save and invest it the way you prefer rather than being tied to an IRS-set interest rate like most defined benefit plans.
MARK MAUND: Recent low interest rates have affected required contributions, but the VIP cash balance defined benefit plan offers more flexibility for clients who want to save significantly more for retirement.
CHRIS LEWIS: This plan sounds like a significant benefit for those who wish to contribute more than typical 401(k) limits. Do you have an example that illustrates how this works?
MARK MAUND: My first client who used this approach about 18 years ago was a physician who had paid full tuition for two children through private colleges and postgraduate work. He did not have much saved for retirement until he was 52, so we implemented a cash balance defined benefit plan with VIP features.
MARK MAUND: The plan enabled him to save at a level that supported retirement. He is still practicing medicine at age 70 but has the financial ability to retire if he chooses. The plan also allowed him to take care of his employees without excessive cost.
MARK MAUND: Because you can combine a VIP cash balance plan with a profit-sharing plan—subject to certain parameters—it is a strong opportunity for people over 50 who do not have a large number of employees relative to owners or key personnel. It lets those individuals put away the additional retirement savings they need.
CHRIS LEWIS: We have found this plan to be a valuable resource in how our Private Client Service Group works with Wealth Management on planning and implementation, utilizing our professionals within Cherry Bekaert. Mark, thank you for your time this morning and for shedding light on the VIP plan. I appreciate your time.
MARK MAUND: Thank you.
CHRIS LEWIS: That concludes our podcast for the day.
