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Alternative Wealth is a podcast focused on advanced tax planning & wealth preservation for business owners, entrepreneurs, and high income earners hosted by Ryan Kolden. Weekly guest interviews, plus shorter deep-dive episodes about business planning, tax mitigation strategies, alternative investments, personal finance, and retirement strategies. Covering everything from private equity, venture capital, hedge funds, private credit, & real estate to tax-efficient exits & captive insurance corporations, privatized banking, and different retirement strategies.
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Ryan Kolden:
Today, I'm going to introduce you to a retirement plan for business owners that you've probably never heard about before. Welcome to Alternative Wealth, where we explore traditional and alternative investing, retirement, and personal finance concepts. I'm your host, Ryan Kolden. Join us as we talk about the strategies and tactics that can help you make better financial decisions.
Disclaimer & Disclosure: Ryan Kolden is an investment advisor representative of RPG Family Wealth Advisory. Kolden Wealth is a DBA of RPG Family Wealth Advisory. The opinions expressed by the host and or guests in this podcast do not necessarily reflect the opinions of Kolden Wealth or RPG Family Wealth Advisory. No information on this podcast should be construed as investment, legal, tax, or financial advice.
Ryan Kolden: So if you're a business owner, you know it's on you to set up a retirement plan for both you as well as your employees. But with all of the different choices out there, Things like solo 401k, SEPs, cash balance plans. How do you know which option is best for you and your business? Today, I'm gonna introduce you to a little-known retirement plan option for business owners called a non-qualified pension plan. And as always, this is not tax, legal, or financial advice. It's for informational purposes only. So I want to start off by saying that this is not some super duper wham and I'm special secret tax code. This is an employee benefit program that happens to be in the tax code. And if you're a business owner, and again, it doesn't matter what structure your business is, whether it's an LLC, C-corp, S-corp partnership, go ahead. And I strongly recommend this, that you flip through IRS Pub 15B, and familiarizing yourself with it, because it's employee benefits that you can take deductions for. So what we're going to be talking about today was first put in the tax code back in 1953. And to be clear, there are two types of pension plans business owners can set up. The first is what's called a qualified pension plan, which includes things like cash balance plans, defined benefit plans, 412 plans, things like that. And what we're gonna be going over today is a non-qualified pension plan. And again, it's been around for about 70 years now, so it's not new. And the question we get a lot is, if it's been around for so long, why haven't I heard about it? So I'm gonna give you my opinion why you haven't heard about it. In 1953, there was no such thing as an LLC or an S-corp, right? It was only C-corps, partnerships, and sole proprietorships. The non-qualified pension plan was specifically created for C-Corps, but the non-qualified pension plan used to be very popular up until about the 1990s when Wyoming came out with the first LLC structure. And since then, it's become super popular and all 50 states have since adopted it, which is why we see less and less C-Corps, which again is in my opinion, why we don't see people using the non-qualified pension plan as much anymore. But if you're running your business as an LLC or an S-corp, that's a non-issue because you can still utilize this employee benefit program, the non-qualified pension plan, as long as you work with the right professionals to help you, number one, establish it. And this is the most important part, number two, administer it. So the first thing that you need to know is that the non-qualified pension plan is actually an employee benefit plan, just like a SEP IRA or a 401k or something like that. And what that allows from a tax planning standpoint is it allows the business to pay for contributions to the plan on a 100% tax deductible basis. And the employee receives that benefit in their own personal name, so they will pay a tax on that contribution, but it's a partial tax. And generally speaking, it's only about 50%. So think about that for a minute. As a business owner, 50% of the contributions that go in are non-taxable. they go in tax-exempt, they grow tax-free, and then they withdraw tax-free. And then the other 50% of the contributions that are taxable function like a Roth. You pay ordinary income taxes on that 50% that goes into the pension, those contributions grow tax-free, and then they withdraw tax-free. Now, I want to compare this real quick to some other common traditional retirement plans. And the reason that I really like the non-qualified pension plan is due to the lack of limitations. So if you think about a 401k, you're going to be limited by how much you can put into it, okay? On a Roth, whether it's a Roth 401k or a Roth IRA, you're limited on how much money that you can contribute to it. There's also early withdrawal penalties on traditional plans. Just as a real quick side note, one of the great things that I do like about Ross, generally speaking, is that you can pull your principal contributions out early with no penalty. So you just can't take out earnings and interest. So any growth on it, you can take out principal contributions, but no growth, no earnings, no dividends, anything like that. But back to the non-qualified pension plan. So the non-qualified pension plan doesn't have any type of limitations with it. Very little limitations. No limitations on income, no limitations on how much you can contribute, and no early withdrawal penalties. An additional benefit, it's also creditor-proof from the majority of states. California is definitely not one of those states it's creditor-proof from, go figure. And then from the business owner's perspective, There's a 100% tax deduction on the money put into the plan on behalf of the employees. Another reason to consider a non-qualified pension plan, especially if you're a small business owner, is the cost to administer the program. Now, compared to matching a percentage of an employee's salary with a 401k, from an employee cost standpoint, a non-qualified pension plan is significantly less expensive than a traditional 401k or simple IRA match or anything like that. Additionally, non-qualified pension plans can also help you fulfill some more advanced business planning and critical business applications. Things such as buyout arrangements between partners, cross-purchase buy-sell agreements, which are typically owned by the employees to make, which means that they're non-tax deductible. So this gives you a deductible cross-purchase agreement. And probably one of the biggest applications we've seen recently is golden handcuffs. A lot of business owners have been utilizing the non-qualified pension plan as a way to, number one, attract, and then number two, retain key employees. And they do that by using the non-qualified pension plan to serve as bonus compensation. That comes with a vesting schedule. This way you can actually incentivize a key employee to stay for a certain period of time. And if they do stay for that certain period of time, they get to leave with a bonus. And on the flip side, if they don't stay for that vesting schedule, the business will actually get that cash back that they put into it, right? So to summarize, as a business owner, you have the option of utilizing a non-qualified pension plan to fund your retirement. And it gives a lot of tax benefits and flexibility when it comes to rules, income and contribution limits, and things like that compared to your traditional 401k and cash balance plan. I've found that it provides a ton of utility for business owners, executives, and other high income earners. And although we covered a lot today, there's still a ton of details and technicals about the non-qualified pension plan that I wasn't able to cover. So if you are a business owner, entrepreneur, or founder, and you want to learn more about how you can use a non-qualified pension plan in your business, click the link in the description to set up a time to speak with me. Hope you found this useful. Please like and subscribe to the show and share this with someone you think might find it helpful. Take care and talk to you next time. The opinions and views expressed here are for informational purposes only and does not tax, legal, financial, investment, or accounting advice. This material is educational in nature and should not be deemed as solicitation of any specific product or service. All investments involve risk and a potential for a loss of principal. Should you need such advice, please consult with a licensed financial, tax, or legal professional. Neither host nor guest can be held responsible for any direct or incidental loss incurred by applying any of the information offered.