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Pension Plan Procrastination Puts Proper Personal Planning in Peril

By Jerry Kalish

I'm not going to ask you to say that headline ten times fast, Peter Piper-style (although feel free to try!). Rather, it’s my alliterative way of pointing (sorry about that) out that waiting until the last minute to establish a retirement plan can be costly. And by last minute, I mean year-end.

The conventional wisdom is that you can wait until the end of the year to put a retirement plan in place since you can still get the tax benefits for the whole year. But here are a few considerations to keep in mind, particularly if you're a shareholder-employee--in other words, if you own your company, but for tax purposes you pay yourself a salary:

Let’s say you’re a shareholder-employee of an S-corporation. An S-corporation is one that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code, under which the S-corporation does not pay any income taxes. Instead, the corporation's income or losses are divided among and passed through to its shareholders--such as, say, you, if you are the owner of an S-corporation. The shareholders must then report the income or loss on their own individual income tax returns.

And maybe you’re one of those shareholder-employees who has minimized your W-2 compensation for payroll tax reasons so that the balance of your income goes on a K-1. The problem with this, it's worth noting, is that only W-2 compensation counts for retirement plan purposes, and so minimizing W-2 income also minimizes the basis upon which retirement benefits can be provided.

Or maybe you want to set up a 401(k) plan for the year. If you do, there may be enough time for you to maximize your 401(k) contributions as an employee of your corporation. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption, by contrast, provides only December payroll as a basis for employee deferral.

Instead, by making regular, systematic investments throughout the year, you get the benefit of “dollar cost averaging," and don’t have to worry about timing the market. Contrarian thinking today is that the market meltdown is a wonderful opportunity because stocks are ‘on sale’. If you are making regular 401(k) contributions, you are buying more shares than you could’ve bought previously.

So think of this as an alarm: get done what you can with what remains of 2008. And is it too early to start planning new year's resolutions?

Jerry Kalish is founder and President of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. He blogs at The Retirement Plan Blog and can be reached at jerry@nationalbenefit.com.

Comments (1)

October 21, 2008 12:43 PM

Comments (1)

Mickey:

Nice piece. I think dollar cost investing works well provided the investor who is profiled understands the possible different outcomes that can result from market direction & frequency used compared to lump sum investing. Volatility of the investment instrument used is also a highly contributing factor on the returns derived from this strategy. With a basic understanding of markets, savvy investors should consider actively shifting between lump sum investing & dollar cost averaging throughout their investing horizon.

Mickey
My Informative Article:
Dollar Cost Averaging Explained Here

Posted by Mickey | September 29, 2009 11:57 PM

Posted on September 29, 2009 23:57