Defined Benefit Plans Can Strengthen Income, Tax and Healthcare Strategies
Little-known aspects of pension plans can be highly beneficial for retirees’ increasingly long lives. Employers aided by specialized accounting professionals must take the initiative to establish plans that complement traditional 401(k) plans. Lesser-known 401(h) plans extend tax benefits beyond traditional health savings accounts. Watch the interview with retirement expert Nick Paleveda, JD, MBA.
Guaranteed lifetime income in the form of a fully insured defined benefit plan, or pension, provides distinct advantages to 401(k) plans. In contrast to the inherent market volatility of 401(k) plans, pensions, which are nearly 100 years old, are typically secured through a domestic insurance company that will guarantee a rate of return over time. Consider 2008, when pension plan values increased by 4% as the stock market declined 37%.
Employers establishing pension plans for themselves and employees can reap many benefits. Plan contributions are exempt from many common taxes including Social Security and Medicare, and gains within plans grow tax-free until withdrawal.
Digging deeper, pension plan assets designated for potential medical expenses can be highly advantageous. Money within the plan specified under 401(h) provisions can be withdrawn for medical purposes tax-free. Again, 401(h) is a component of a pension plan, and not a 401(k), and is subject to limits and medical situations specified in the written plan. By partitioning the contribution, the remainder is subject to reduced tax rates when those funds are accessed for lifestyle, and not medical, purposes. Contributions into a 401(h) can be an addition to popular health savings accounts, which allow for up to $7,750 in annual contributions for savers age 55 or older, for tax-free, medically-purposed withdrawals.
Awareness of this type retirement plan nuance is particularly low, and availability of information is not widely known. While CPA’s are typically relied upon for such guidance, implementation usually involves a tax attorney working with an enrolled actuary, a data-based accounting professional. Enrolled actuaries are becoming increasingly hard to locate, representing less than 1% of the CPA population.
Though largely under the radar, accessible books regarding pension plans and the power of disciplined savings include Fully Insured Defined Benefit Plans by Nicholas Paleveda; Rule #1, The Simple Strategy for Successful Investing in Only 15 Minutes a Week by Phil Town; and The Millionaire Next Door by Thomas Stanley.
Syndicated financial columnist Steve Savant interviews best selling author, popular platform speaker and retirement expert Nick Paleveda, JD, MBA. Right on the Money Show is an hour long financial talk distributed to 280 media outlets, social media networks and financial industry portals.