Small Business Owners
Land Banking for Business Owners
Defined Benefit Plans
Advantages of Defined Benefit Plans:
- You can save more for retirement—possibly up to 100% of annual salary.
- You can control your investments by diversifying out of the stock market—maximizing profits.
- You can “catch-up” on an under-funded retirement account—ensuring your future income.
Many small business owners face the dilemma of making critical decisions regarding retirement planning and still maximize their current and future profit.
What many of these business owners don’t realize is that defined benefits plans allow much greater savings for the independent businessman than a 401(k) or an IRA. The maximum allowable 401(k) contribution for 2007 is $20,500, whereas in a Defined Benefits plan, the same workers can contribute as much as 100% of their income, depending upon age and salary.
Charles Schwab, for example, rolled out their Personal Defined Benefit Plan a few years ago, in which investors are contributing as much as $100,000 to $150,000 annually. These small scale plans are targeted at businesses with one to five employees. The greatest advantage is that these plans allow small business owners to set aside much larger sums for retirement while still reducing their tax burdens.
What is really attractive to these entrepreneurs is the fact that a worker can still participate in a 401(k).
The ability to supercharge retirement savings helps explain these plans growing popularity. Both employees and owners who haven’t saved enough for retirement really have a chance to “catch up” and make significant progress towards a well financed retirement.
If you’d like to find out more about Defined Benefits Plans and how they can work for your business, Contact Us or one of our APN members and we would be happy to answer any questions you might have.
Pension Plans have been around for decades, but generally have been relegated to large companies running them for the benefit of workers. The rise of the 401(k) plan left most Pension Plans out of favor.
Pensions however are typically run by business professionals with a fiduciary responsibility to their clients. They are usually run as if they’ll be around forever and so tend to be better diversified between stocks, bonds, real estate, cash and other assets.
By contrast, 401(k)s are typically self-directed—meaning workers, who may not have any experience at investing, make many of the decisions regarding import aspects of their future retirement plans.
The uncertainty of the stock market and wild fluctuations with even the most stable of investments has resulted in a renewed interest towards professionally managed Pension Plans.
Your first consideration when deciding on a Pension Plan is to determine whether you would benefit most from a Defined Benefit Plan or a Defined Contribution Plan.
Defined Contribution:
Compromising a broad range of programs—such as profit sharing, 401(k), money purchase, Keogh, and SEP-IRA plans– allow owners and employees to make retirement contributions that are allocated to individual participant accounts. Funds available at retirement are the accumulation of those contributions plus investment earnings. But, it’s uncertain what the expected amount, or benefit will be at retirement. These plans are generally more favorable to younger employees who have a longer time horizon until retirement.
Defined Benefit:
Defined Benefit Plans (DBPs) promise participants a specific monthly lifetime benefit amount at retirement. A benefit formula is created that targets a level of retirement income that can be supported by your desired annual contribution level (subject to IRS benefit limits). Contribution amounts are then calculated and adjusted annually to ensure that the target goal is reached. Contributions for all plan participants are kept in a single account that is used to pay the promised benefits.
Defined benefit plans tend to favor long service, highly compensated business owners, partners and key employees who are in their peak earning years. DBPs can also be especially beneficial for those who are planning to retire in less than 10 years, because they allow higher contributions.
Land Banking for Business Owners
Advantages of Land Banking:
- You are investing in “Real” property, so you hold title not just paper.
- Holding real estate as a long-term appreciation strategy.
As market conditions become unstable other options become more appealing. Land Banking is such an option. Simply put, land banking is the purchasing of pre-developed property that allows for future growth. It is not a fund that relies on management so is very cost effective to run. There are some key considerations to evaluate before purchasing and we’ll discuss those considerations in this issue. If you’d like to know more about Land Banking, Contact Us and a Land Banking Specialist will answer your question at no cost to you.
Land Banking an Option for Small Business:
Small business investors cast a wary eye on the stock markets wild fluctuations and questionable yield. The number one reason for 401(k) or IRA investment by small business is to secure retirement for business owners and their employees. The enactment of IRS code 408 allows investors to diversify their retirement plans (called “Self-Directed” plans). One interesting option that has arisen is the investment into pre-developed real estate or Land Banking. The key is location (isn’t it always?). Purchasing land that is in the path of growth of a major metropolitan area can really make a difference to future value. Of course there isn’t much of that type of land available anymore, and finding a professional that can help in the search is going to be key to the success of such a venture.
A Brief History of Land Banking:
Land Banking was a real estate option traditionally reserved only for the super rich or very large corporations. Now with the ability to roll your IRA, 401(k) and other retirement funds into select real estate, the door is open for individuals to take advantage of real estate through land banking.
With the advent of the 401(k) and other investment devices designed specifically for middle and upper income investors, more substantial sums of money became available for larger investments. The stock market became flush with money from pension funds driven by these plans. Then, with the advent of parcel development and joint tenancy, smaller divisions of land became available and today, individuals with as little as $10,000 can own real property. As more ordinary Americans become aware of these opportunities, we can expect a shortage of real property in the future. Even today, in many counties, land is simply unavailable.
The most common form of real estate investment would be buying a house in hopes that we can hold it, either by living in it or renting it out, and then selling it for a profit a few years later. This group of investors is what we call House Buyers, whom most of us belong. Who do the House Buyers buy their house from? The Developers! This is another group of investors who buy a piece of land, build houses and sell them for a profit. Now developers in turn buy land from landowners who are often Land Bankers.
Please Contact Us if you have questions about Land Banking and how you can get started.
