On October 19, 2017, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year of 2018.
Highlights of Changes for 2018
The contribution limit for employees who participate in 401k, 403b, most 457 plans, and the federal government’s Thrift Savings Plan is increased from $18,000 to $18,500.
The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs and to claim the saver’s credit all increased for 2018.
Click here to view the 2018_plan_limits
The Real Income™ portfolio strategy does not use leverage, derivatives, or short-selling. Portfolios are constructed with 25-35 securities consisting of various types of liquid REITs.
The property types include apartments, regional malls, shopping centers, lodging, office, industrial, self-storage, data centers/tech, and a variety of health care related facilities. All portfolio companies are classified into one of three categories, and portfolios maintain allocations to each within the following risk categories:
- Core (40% to 70%): Companies with superior balance sheets, established track records, and moderate growth
- Value Add (20% to 50%): Companies with moderate leverage, established track records, and high growth potential, both internal and external
- Opportunistic (0% to 25%): Companies with high leverage, unproven track records, and high growth potential, both internal and external.
For the most recent portfolio update, click this link: Real Income Portfolio 09-30-2017
During the crisis, central banks lowered interest rates dramatically during the stock market crash. The Fed Funds Rate went from 5.25% July 2007 to 3.0% March 2008 (when Bear Stearns failed, most people remember Lehman, which failed in September). That summer Freddie Mac and Fannie Mae failed and the FFR was lowered to 2% and then 1% in September and finally 0% was the official rate in December 2008. All the while financial asset prices kept falling and the economy was hemorrhaging. Soon after hitting 0% as the cost of money to the banking system, the Federal Reserve started Quantitative Easing, where the Federal Reserve would buy mortgage backed securities (as well as other tax-payer insured instruments) to provide ‘liquidity’ to the markets. The stated goal was to increase the prices of assets (stocks, real estate, bonds) so that the “wealth effect” would spur people to spend money rather than save it. Given the anemic pace of economic expansion, the primary effect QE has had has been to push up stock prices well beyond normal valuations.
While the US has ceased QE, raised interest rates off the 0% mark, and laid out a plan to shrink its balance sheet (taking liquidity away from the market); the European and Japanese central banks continue to buy assets. The Europeans buy corporate bonds and the Japanese buy everything including equities. The ECB has expressed a desire to cease its purchases (stopping new liquidity into the market) starting in 2018, but have not committed to a schedule. The chart above combines all the central bank’s asset purchases and projections into 2019 overlaid with global equities. On the chart below, notice how the EM (emerging markets withdrew liquidity late 2015 to 2017—emerging market stock indices (EEM) fell 39% from Sept 2014 through Jan 2016). Additionally we can observe the effect central bank purchases have had on interest rate spreads, giving investors the most meager additional interest for taking on additional risk.
The chart shows the Fed’s net reductions in liquidity and the Swiss, Japanese and Europeans declining levels of new liquidity to the marketplace. Given that adding liquidity boosted asset prices, as additional liquidity slows and possibly reverses, it is not unreasonable to assume markets will become much more volatile as we approach that time. We will likely see the effects of Quantitative Tightening (QT) beginning in, and throughout 2018. One way to counteract this, would be for private investors to save/invest rather than spend this difference (approx. $1.2 trillion), but a reduction in consumer spending would bring its own problems.
The Pension Protection Act of 2006 (PPA) is long and hard to read, but it played a crucial role in establishing cash balance plans as a viable and legally recognized retirement savings option. Before 2006, cash balance plans faced frequent legal challenges. Those bringing the suits argued that cash balance plans violated established rules for benefit accrual and discriminated against older workers. The rulings on these cases were inconsistent, and many business owners were reluctant to risk establishing a plan that just didn’t have firm legal footing.
The Pension Protection Act ended this uncertainty about the legality of cash balance plans. The legislation set specific requirements for cash balance plans, including:
- A vesting requirement: Any employee who has worked for their company for at least three years must be 100% vested in their accrued benefits from employer contributions.
- A change in the calculation of lump sum payments: Participants in a cash balance plan can usually choose to receive a lump sum upon retirement or upon the termination of employment instead of receiving their money as a lifetime annuity. Before 2006, some plans used one interest rate to calculate out the anticipated account balance upon retirement, but, when participants opted to receive an earlier lump sum, the plan called for using a different interest rate to discount the anticipated retirement balance back to the date of the lump sum payment. This could lead to discrepancies between the hypothetical balance of the account (as determined by employer contributions and accumulated interest credits) and the actual lump sum payout, an effect known as “whipsaw”. The PPA eliminated the whipsaw effect by allowing the lump sum payout to simply equal the hypothetical account balance.
- Clarification on age discrimination claims: A cash balance plan does not violate age discrimination legislation if the account balance of an older employee is compared with that of a similarly situated younger employee (i.e. with the same length of employment, pay, job title, date of hire, and work history), and the older employee’s balance is equal to or greater than the younger employee’s.
There are, of course, many other points included in this lengthy piece of legislation, but the takeaway is this: the Pension Protection Act of 2006 removed the legal uncertainty surrounding cash balance plans and made them a much more appealing option for small business owners.
The number of cash balance plans in America more than tripled after the implementation of the PPA. Additional regulations in 2010 and 2014 made these hybrid plans an even better option, and we anticipate that their popularity will continue to grow. There are thousands of high-earning business owners out there who can reap huge, tax-crushing benefits from implementing cash balance plan – they just have to know about them first.
In 1978, Congress decided that Americans needed a bit of encouragement to save more money for retirement. They thought that if they gave people a way to save for retirement while at the same time lowering their state and dederal taxes, they might just take advantage of it. The Tax Reform Act was passed. Part of it authorized the creation of a tax-deferred savings plan for employees. The plan got its name from its section number and paragraph in the Internal Revenue Code — section 401, paragraph (k).
Ted Benna, who was a benefits consultant, actually came up with the first version of this plan. His plan was officially accepted by the IRS and proposed regulations were issued in 1981. In 1982, taxpayers were able to take advantage of this new plan for the first time. It took almost 10 years, but final regulations were eventually published in 1991.
When people talk about 401(k) plans, you often hear about advantages like:
- Free money from your employer
- Lower taxable income
- Savings and earnings that accumulate without you having to remember to make deposits
- The opportunity to retire and not have to worry about money anymore
Does this sound too good to be true? It isn’t. It’s what you can gain from investing in your company’s 401(k) plan. The 401(k) is one of the most popular retirement plans around.
Although retirement plans may be the farthest thing from your mind, think about how much of a difference 10 years can make in the investing world. You’ll learn about that difference in this article. If your employer offers a 401(k) plan, it makes a lot of sense to participate in it as soon as possible. If you start early, maybe when you’re 25 or so, you can very likely have a million or two (or more) in your account by the time you retire.
401(k) plans are part of a family of retirement plans known as defined contribution plans. Other defined contribution plans include profit sharing plans, IRAs and Simple IRAs, SEPs, and money purchase plans. They are called “defined contribution plans” because the amount that is contributed is defined either by the employee (a.k.a. the participant) or the employer.
For more information, please contact us.
The NAMCOA Real Income Portfolio is an actively managed diversified portfolio with an objective of providing income from dividends.
Structured as a separately managed portfolio to minimize client fees and other costs, the portfolio focuses primarily on Real Estate Investment Trusts, but can invest up to 30% in preferred stock and floating rate interest products. The portfolio targets to invest in 25 to 35 equities. The portfolio DOES NOT use any leverage or derivatives.
- These performance figures are NET of its all management fees and trading costs, meaning no other fees, commissions, hidden charges or surprises.
- The minimum account size starts at $100,000.
- Distributions can be reinvested or taken in cash.
- Clients have 24/7 online access to view their account and portfolio positions at either Fidelity or Interactive Brokers.
- The portfolio is liquid any business day, but is subject to market fluctuations.
See attached portfolio fact sheet and other risk disclosures.
For more information, contact Walter Hester at email@example.com
Despite the explosive growth and substantial tax benefits of cash balance plans, most Americans are unfamiliar with one of the best tax-deferred savings opportunities in existence. When combined with a 401(k) profit-sharing plan, cash balance plans substantially increase the contribution limits for retirement plans, sometimes increasing available top-line deductions by over 400%. This means that participants, particularly older contributors, can accelerate their retirement savings and simultaneously take advantage of significant tax savings.
Cash balance plans are classified as “hybrid” retirement plans: defined benefit plans (think traditional pension plan) that function like defined contribution plans (think 401(k)). Like a defined benefit plan, the ultimate benefit received is a fixed amount, independent of investment performance. The plan sponsor directs investments and ultimately bears investment risk. What sets a cash balance plan apart, though, is its flexibility and hybrid nature that makes its function appear similar to that of a 401(k).
When businesses choose to add a cash balance plan, they generally do so on top of an existing 401(k) profit-sharing plan. This allows high-earning employees to put away more money for retirement at a much faster rate while providing significant tax savings.
Those who stand to benefit the most from a cash balance plan include:
• Professionals with high incomes such as doctors, engineers, lawyers, orthodontists, etc.
• Business owners over 45 looking to substantially increase their retirement savings in the coming years
• Highly-profitable companies
• Business owners wanting to contribute more than the traditional 401(k) limits to their retirement while accruing substantial tax savings
For Americans earning over $400,000 per year, cash balance plans are a game-changer. With the potential for hundreds of thousands of dollars in annual tax savings, a closer look is well worth the time.