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Do you have a 201(k) instead of a 401(k)?

The current question for many people is, “What if my portfolio doesn’t come back? I don’t know if I can put enough into my 401(k) to make up for what I have lost.”What can you do if you planned on $2,500,000 of retirement savings that has dropped by one third or more? Except for Cost of Living Allowance (COLA) increases, a 55-year-old will probably not be able to make up the difference by contributions at the maximum per year to meet their goal of retiring at age 65. A different accumulation vehicle will be needed that offers favorable tax treatment, reasonable anticipated returns, flexibility and unlimited contributions to potentially meet retirement goals. For business owners, this is a tough discussion. I have asked one of our purveyors, Economics Concepts*, to assist me with a solution to this hypothetical situation. Please remember your situation is different, and your results will vary.Dr. Casey is one of five doctors in a medical practice. They employ a staff of 15 people ranging from the receptionist to medical technicians, with salaries ranging from $14,000 to $60,000. Each doctor typically takes W2 income of $350,000 from the corporation, which is sufficient to maintain their lifestyle. They have a 401(k) plan in place, but find the limitations on contributions make it insufficient to adequately fund a retirement plan. They also find there are additional profits in the practice, which result in more income; therefore, more taxes that they would like to reduce. They looked into a defined benefit plan, but found the cost to cover employees represented more than 40 percent of the total contribution. Had they taken the money as a bonus, they would have netted the same dollars to invest after tax.What the doctors needed was a vehicle for additional tax-advantaged retirement savings while minimizing the cost of covering the ancillary employees. We start with basic group term coverage on all employees. In this case, the practice already had group term in place in conjunction with their health insurance program. The contributions paid for this benefit are tax deductible to the professional corporation and not taxable income to the employees.The plan also allows for the purchase of additional insurance on a tax-favorable basis. The premiums for additional coverage are 100 percent tax deductible by the C corporation. But more importantly, only a portion of that cost is reportable as taxable income by the participant. In this case, if the doctors choose to fund their plans with permanent insurance, less than 65 percent of the actual premium is reportable on their personal returns. The permanent insurance provides them not only with lifetime, portable coverage but also builds cash values that can be accessed later tax-free to provide supplemental retirement income.*Economic Concepts Inc. is a nationally recognized firm that works with professional financial advisors to provide plans for successful business owners and professionals.DR. CASEYM45 PREFNS BF ñ 8.5 percentAbout Alex Donnell and Colorado Comprehensive Wealth ManagementAs a nationally published author, Alex Donnell has written articles on estate planning, financial planning and investments. Alex is the founder and president of Colorado Comprehensive Wealth Management in Colorado Springs and an independent investment advisor representative. Heartland Financial Consultants and has been a part of the financial services industry for over 16 years.Colorado Comprehensive Wealth ManagementPhone: (719) 886-3377Web site: www.donnellservices.comSecurities offered through Securities America, Inc., Member FINRA/SIPC, L. Alexander Donnell, Registered Representative. Advisory services offered through Heartland Financial, L. Alexander Donnell, Investment Advisor Representative. Colorado Comprehensive Wealth Management, LLC, Heartland Financial Companies, and Securities America are not affiliated. 07/2008

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