Asset Management in A Cash Balance Plan

The plan document will specify a target rate of return – usually between 3% and 6%.  This target rate must be realistic and there needs to be some assurance it will be hit every year, year after year, for the plan to succeed.  An investment in the market will typically cause the plan to crash with 3 to 5 years of inception even with the best asset manager in the country.  This type of plan does not work well with the volatility of market returns.

The goal of a CB Plan is current year tax deduction calculated to provide a fixed benefit certain at retirement.  If the financial advisor invests the money in the market and exceeds the target rate of return … that’s great, kudos to the FA … but bad for the business because they cannot put as much into the plan, and so lose the tax deduction.  If the financial advisor under performs the target rate, then in a down market, possibly with business profits down as well, you are faced with an increase in the contribution amount in order to keep the plan intact.  Either result from the FA generates an adverse result for the business owner.

I recommend that a Cash Balance Plan be funded with a mix of insurance products.  An annuity can provide a predictable return consistent with the plan document, and a whole life insurance policy so that the plan self-completes if the business owner dies prematurely.  When you get to retirement, there are ways to transfer ownership of the whole life insurance to the retiree.  Using insurance products gives a consistent tax deduction for the business each year.

Financial Roadmap from Here to Retirement


I have been a Certified Public Accountant for over 25 years.  For many of those years I was also a licensed financial advisor.  A few years ago, through my reading and personal experience, I learned how much the financial markets are stacked against the ordinary investor.  The Investment Risk section of this document will explain some of the things I have learned in this area.  And I came to understand that most of my tax clients should not be putting their money at risk in the market.  What I found was that my clients were “investing” money they could not afford to lose, in hopes of earning enough to provide a comfortable lifestyle – someday.  It was from that perspective that I decided to give up my securities licenses.  I began to look for other methods and tools to help my clients achieve financial success.


Traditional retirement as our parents and grandparents thought of it, was funded by the company they worked for perhaps most of their working life.  The company took care of their retired employees by providing a lifetime stream of income as a reward for their years of loyalty to the company.  Then in the 1980’s the tax code was changed to allow individuals to begin to supplement their retirement income and receive a tax benefit (deduction) for money they put away into special accounts called Individual Retirement Arrangement (IRA) accounts.  As the working public began to embrace the concept of saving for their own retirement, companies cut back on the lifetime benefits they had previously provided.  Soon there was demand for broader choices in personal retirement savings accounts and the 401(k) plan was established as part of the tax code.

The IRA and the 401(k) plans were originally intended to supplement the retirement provided by employers.  Over time as companies cut back on benefits, they became the primary retirement savings vehicle for most Americans.  It didn’t take long for the Wall Street marketing machine to recognize the potential to create vast amounts of wealth (for themselves) by charging a small fee to lots of people who now believed they needed to invest their money in the stock market to provide for retirement.  About this time, the phrase “buy term and invest the difference” became commonly used among financial professionals.  This precipitated a move away from insurance products which provide a lifetime stream of income and toward higher risk market based investments.

But think about it.  What is important as we approach retirement?  Is the goal to have a large pile of money, or is it to have a lifetime income stream?  Wall Street marketing urges us to keep growing the pile of money to fund retirement.  But this gives rise to other questions, such as, “How big does the pile of money need to be?”  “How long will it last?”  “How much of it can I spend each year?”  And, “Will I run out of money?”  There are also other questions that are often overlooked, such as, “What risk am I taking with my retirement money?”  And, “Is there a better way?”


I believe that Investors in general do not understand the costs and risks built into their investment portfolio.  Financial professionals and others are guaranteed to make money off your investment decisions, but you are not.  The investment broker gets paid from your money.  The mutual fund manager gets paid from your money, sometimes in addition to your personal money manager.  The brokerage firm that executes trades for the mutual fund, or your personal money manager gets paid from your money.

All these people get paid from your money whether you gain or lose from the investments.  Mutual fund investors take 100% of the risk and may receive only 30% of the potential return… and even that is not guaranteed.  If all of your retirement money is invested in the market, then all of it is at risk.

Wall Street banks and investment firms would like you to believe the stock market returns an average of 7% per year.  Barry Dyke, in his book, Guaranteed Income:  A Risk-Free Guide to Retirement, cites the Dalbar report (published by a well-respected Boston research firm) showing the average investor return in equity mutual funds from 1/1/1984 to 12/31/2013 was an astonishing 3.69%.  Asset allocation mutual funds returned 1.85% over the same time period, and fixed income funds under 1%.  So, I have to ask, “For that rate of return, is it worth the risk?”

All this seems lopsided and unfair.  How did we get to this point?  Robert B. Reich, in his book, Saving Capitalism:  For the Many, Not the Few, provides some perspective and a thorough explanation.  Over the past 25 years or so, massive wealth has been concentrated in the top 1% of Americans.  Those individuals and institutions that control the wealth have great influence over legislation and government regulations concerning how that wealth is created and protected.

A landmark event occurred in 1999 during the Bill Clinton administration with the repeal of the Glass-Steagall Act, which had separated commercial from investment banking.  Glass-Steagall was originally enacted in 1933 as the country was recovering from the Great Depression brought on by failures in the financial markets.  After the repeal, banks were allowed to own investment firms.  This gave them more freedom to take risks because the government was there to bail out the bank if their investment risks did not work out.

We saw this come to fruition in the 2008 financial meltdown.  Our tax dollars were spent to bail out large financial institutions who had taken undue (even though legal) risks in the credit markets using contracts such as derivatives and credit default swaps.  When those risky positions went bad, the government stepped in and used our tax dollars to make sure the major banks did not fail, thus averting a greater financial crisis.

You may feel you cannot afford to completely ignore the market.  That’s okay.  It’s just that the market is not the safest place for your retirement funds.  The market should not be the only place you have retirement funds; maybe not even the primary place.

If you would like to learn more about protecting your assets from investment risk, the two books mentioned above would be a great place to start.

You only have one chance to prepare for retirement.  Play it safe.


As with so many things in life, success comes by taking small steps in the right direction over a long period of time.  These steps are intended to take you systematically from where you are today to a financially comfortable retirement.  Each step that you take in this process will improve your overall financial condition based on sound, proven financial strategies.  Begin with Step 1 today whatever your age or occupation.

Step 1 – Buy as much term insurance as the insurance company will sell you.

Life insurance is a “want” product not a “need” product.  Focus on what you want to have happen for your family and loved ones if you are not there to provide for them.  This gives a much different answer to the life insurance question than trying to define and anticipate needs of those you leave behind.  Life insurance is the only tool that will enable you to fulfill those wants.

A life insurance company uses your economic life value … an estimate of the amount of your financial contribution to your family (through wages or services) from now until your normal retirement age … to determine the maximum amount of life insurance they will sell to you.  In a business buyout context, the insurance company may be more flexible on the maximum amount depending on other factors.  In this step calculate your economic life value and apply for at least that amount of term insurance.

For example, a 35 year old could reasonably expect to be in the workforce for another 30 years.  So multiply your annual income by 30 years to estimate your economic life value for insurance purposes.  A stay-at-home Mom (or Dad) can generally be insured for one-half the economic life value of the working spouse.

When considering a term life insurance policy, there are some features that would be very desirable to have.  Certainly select a financially healthy company, preferably a mutual company with a long dividend paying history.  It would be good for the term insurance to be convertible to whole life insurance without additional medical underwriting.  Perhaps there would even be an opportunity to recapture some of the term premium payments and apply them to the whole life policy.

You have from today until your next birthday to complete this step and beat the price increase.  Remember, you will never be younger than you are today.  And you will probably never be in better health than you are today.  Consequently, your cost of insurance will never be lower than it is today.

Step 2 – Save at least 15% of your income each month.

This rate of savings will allow you to build an emergency fund sufficient to weather the storms of life that inevitably come.  A healthy financial plan will have you putting away 15% of your income to counteract the effect of wealth eroding factors that are working against you day and night.  Things wear out and need to be replaced.  Houses, appliances, computers and cars need repair and sometimes replacement.

The easiest way to be consistent with your savings plan is to setup payroll deduction or automatic transfer of the amount on a recurring basis to your designated savings account.

Once that savings account balance equals about half your annual income, it will be time to move to the next step.  For now, your local credit union is a good place to put your savings.

Begin this step with your next paycheck.  Even if you can’t put aside 15% right away, it’s important to get started.  Do what you can now, and increase the amount in a couple of months.

Step 3 – Convert your term insurance to whole life insurance over time.

Term insurance is temporary.  It provides a death benefit only.  There is no exit strategy from term insurance.  At the end of the term you either let it lapse or pay a significantly increased premium.  In either event, the money you spent on the term premiums is lost.  The only way you win with term insurance is if you die before the term expires … and who wants that!

As mentioned in Step 1, certain term insurance contracts can be converted to whole life insurance without medical underwriting.

Whole life insurance provides a number of living benefits in addition to the death benefit that term insurance provides.  The premiums are level for the entire contract period.  The cash value within the policy grows tax free as long as the policy remains in force.  There are legitimate ways to use the cash value for personal purposes tax free during your lifetime.  Depending on the policy contract, the cash value may continue its compound growth when you take a policy loan to use the money for other purposes.  You can even use the cash value to fund your children’s or grandchildren’s college education without adversely affecting their financial aid.  It is also a great way to supplement your retirement income stream.  The many benefits of whole life insurance is probably the subject of another book.

The unique features of whole life insurance serve to enhance the value of every other financial product you may own.

Step 4 – Use a pay-down strategy to move your accumulated cash reserve from the bank to your whole life insurance.

Cash in the bank is good.  Compound interest earned on cash in the bank is good … to a point.  When the compound interest leads to compound taxes, it’s time to move the money.  The pay-down strategy systematically moves accumulated cash to a whole life policy where it will continue its compound growth, but without compound taxes.  You maintain full liquidity, access, and control of the cash while providing the additional benefit of increased life insurance protection.  There is a small decrease in total cash for the first few years, but then the cash value in the life insurance contract begins to grow exponentially.

Here is an example for a 35 year old male in good health.  Suppose he is earning $100,000 per year and has saved $50,000 using Step #2 and earns 2% on his savings.  He asks me to design a pay-down strategy for him to use over the next ten years.  Here is what that could look like.


annual savings savings cash total
life ins balance balance value in cash death
year payment beginning ending insurance available benefit
1      (5,457)        50,000    45,434          3,623      49,057    191,234
2      (5,457)        45,434    40,776          8,496      49,272    207,490
3      (5,457)        40,776    36,025       13,610      49,635    223,598
4      (5,457)        36,025    31,179       19,011      50,190    239,493
5      (5,457)        31,179    26,237       24,675      50,912    255,265
6      (5,457)        26,237    21,195       30,614      51,809    270,809
7      (5,457)        21,195    16,053       36,839      52,892    286,145
8      (5,457)        16,053    10,807       43,396      54,203    301,329
9      (5,457)        10,807      5,457       50,262      55,719    316,443
10      (5,457)          5,457             –       57,432      57,432    331,410


After ten years he has transferred the full $50,000 to an account where it can compound tax free without giving up liquidity, access, or control of his cash.  In addition he has provided a significant death benefit that was not available while he held the cash in his savings account.

Step 5 – Borrow a life to increase your savings.

The owner of a whole life policy controls the cash value of the policy.  The owner does not have to be the insured.  When you want more whole life insurance than the insurance company will sell you or when you want to put away more money into tax free savings using whole life insurance, then it is time to “borrow a life” to purchase a policy on someone else.  Of course, it has to be someone in whom you have an insurable interest, like a family member or business associate.  But with that perspective, think about younger members of your family.  The cost of insurance will be less because of their age.  And it gives you the ability to create an even larger deferred compensation arrangement for yourself, or provide tax free funds for future generations.

This technique can be used to super-charge your tax free savings.  It can also be used to transfer assets to others.  Let’s say that I purchase a whole life insurance on my daughter.  I make the premium payments for a few years and the cash value builds.  So then in five years, she wants to purchase a house.  I could gift the policy to her, including the cash value (subject to annual limits on gift tax exclusions) and she would have immediate and unrestricted access to the cash to use as she chooses.

Again, there may be many other reasons to borrow a life, but that is probably another book.

Step 6 – Cover your risk for long term care.

At or about age 60 is time to consider the cost of long term care insurance.  Stand-alone LTC policies are available, but they are pricey.  As with any stand-alone account, if you don’t use it for its intended purpose it can be very expensive.

Consider instead a LTC rider on a new whole life insurance policy.  This is a much less expensive option to obtain the same or better benefits than offered with a stand-alone policy.  Plus it includes all the benefits of whole life insurance.

Step 7 – Transition to retirement.

If you’ve followed the steps to this point, you probably own several whole life insurance policies with substantial cash value.  Begin selectively converting the cash value in those policies into annuity contracts to provide your lifetime stream of income.  And enjoy your retirement!

Why not start by purchasing an annuity?  Two reasons:  the cash value builds faster in a life insurance policy; and secondly, the life insurance provides the death benefit protection and other benefits during life if you don’t make it to retirement.

Disclosure and Call to Action

The suggestions and strategies described in this article are my opinions developed over years of tax and financial planning experience.  Every person’s financial situation is different.  Carefully consider this information in light of your own finances before implementing any of these suggestions.

If any of these ideas caught your interest, let’s meet so I can personalize a plan for you.  I would like to review your personal financial situation with you and show you specific improvements that can make your current income achieve the best possible results … FOR YOU!


Cash Balance Plan

A Cash Balance Plan is a Defined Benefit Plan that can be a good complement to a company 401(k) or other Defined Contribution Plan and allows business owners to increase the amount they can put aside for retirement by as much as four times the limit for a 401(k) Profit Sharing Plan alone.  With an ERISA plan already in place, the CB Plan contributions can be skewed in favor of the older and more highly compensated owners.

Why Life Insurance Should Be Part of Your Financial Plan

We all have hopes and dreams of what we can achieve in life.  Many times those hopes and dreams involve caring for others or providing for those we love.  Very simply put, a properly designed life insurance policy can make sure that you and those you care about can pursue those dreams regardless of the unexpected events that may overtake you.  Life insurance is about much more than a death benefit; it can also provide living benefits.

For example, consider the case of a 52 year old father of two with a couple of term life insurance policies in force.  A few years after those policies were issued, he had a health event that affected his ability to obtain additional life insurance.  Using the provisions in one of the policies, we were able to convert the term insurance to a permanent policy without medical underwriting, and thus get the new policy at a better rate than his current health would otherwise allow.  The policy was designed well from the beginning or I may not have been as successful with helping him keep the protection he wanted.

Protection before Growth

If you were thinking of building a castle in a hostile land, what would you build first?  Most people I talk with would start with the moat or the walls for protection.  Why is it that we don’t approach planning for our financial future the same way?  All too often we put all our efforts into growing our wealth before giving thought to protecting what we have in the way of assets, income, and wealth.  I turn the traditional financial planning model upside down so as to address protection needs first.  If I can protect you from loss with some amount of certainty, that seems better than pursuing the possibility pot of gold at the end of a rainbow.  Using various types of insurance for protection engages others to share your risk of loss.

How is Financial Planning Different From Financial Coaching?

The unstated goal of financial planning is to sell a product or service.  If a financial advisor obtains enough information, he or she can usually show how purchasing their product will help you attain your goals.  A financial plan is just that – a dream or goal where the assumptions are managed to produce the desired result.  You may not be able to test the validity of those assumptions until too much time has elapsed to recover from faulty assumptions.

The role of a financial coach is different.  A coach helps to bring out the best in you; helps you achieve your best financial results without regard to personal compensation or gain for the coach.  The reward is in seeing you succeed.  The coaching process is product neutral, not product driven.  A good coach will guide you using sound economic principles to help you achieve the best possible results for your financial situation.

As your financial coach, I will help you create strategies for success.  I would rather help you create 30 one year financial plans with regular reviews than one 30 year plan that is never looked at again.

Filing Season Is Now Open

As of yesterday you can now officially file your 2016 tax return!  Although filing early, for some, may not mean an early refund.  There’s a new law that requires the IRS hold refunds until mid-February.  This will only affect those that claim the Earned Income Tax Credit and the Additional Child Tax Credit.

I know, you’re thinking, they’ve already had your money long enough, so why do they get to hold onto it longer?  There’s a perfectly good reason for this and it has to do with identity theft and refund fraud.  The cliff notes explanation is by holding the refund longer the agency is better able to weed out the fraudulent returns from the legitimate returns.  The IRS has been making significant progress in the fight against identity theft and refund fraud.  Thus far, they have seen a 50% decline in the number of new reports of stolen identities on tax returns.

I understand this is a complete inconvenience and frustration for our legitimate returns but it’s better to know what’s going on ahead of time.  The IRS will start releasing the refunds on February 15th but you shouldn’t expect to see the money in your account until after February 27th.

Click here to check out more information on this.


It’s Tax Season!

A new year has begun bringing with it the start of tax season!  I know, just hearing the word taxes can cause anxiety and stress therefore, causing you to put it off as long as possible.  There’s no need to panic, I’m here to help you!  Free yourself from the anxiety and stress and let me and my team handle your taxes.

All that you need to do is start prepping.  As your tax documents start arriving in the mail put them in a file, envelope, or shoe box to bring to us.  If they’re organized, great!  If not, don’t worry, we’ll make sense of it all!  When you’ve got all your documents ready you can schedule an appointment or just come right on in.  It’s that simple!  We really try to make this as painless as possible for you.  If you have more questions or the anxiety is already taking hold please schedule an appointment here so we can talk through your personal tax situation.



Revised Due Dates for Partnership and C Corporation Returns provided by Thompson Reuters

On July 31, 2015, President Obama signed into law P.L. 114-41, the “Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.” Although this new law was primarily designed as a 3-month stopgap extension of the Highway Trust Fund and related measures, it includes a number of important tax provisions, including revised due dates for partnership and C corporation returns and revised extended due dates for some returns. This letter provides an overview of these provisions, which may have an impact on you, your family, or your business.

Revised Due Dates for Partnership and C Corporation Returns

Domestic corporations (including S corporations) currently must file their returns by the 15th day of the third month after the end of their tax year. Thus, corporations using the calendar year must file their returns by Mar. 15 of the following year. The partnership return is due on the 15th day of the fourth month after the end of the partnership’s tax year. Thus, partnerships using a calendar year must file their returns by Apr. 15 of the following year. Since the due date of the partnership return is the same date as the due date for an individual tax return, individuals holding partnership interests often must file for an extension to file their returns because their Schedule K-1s may not arrive until the last minute.

Under the new law, in a major restructuring of entity return due dates, effective generally for returns for tax years beginning after Dec. 31, 2015:

  • Partnerships and S corporations will have to file their returns by the 15th day of the third month after the end of the tax year. Thus, entities using a calendar year will have to file by Mar. 15 of the following year. In other words, the filing deadline for partnerships will be accelerated by one month; the filing deadline for S corporations stays the same. By having most partnership returns due one month before individual returns are due, taxpayers and practitioners will generally not have to extend, or scurry around at the last minute to file, the returns of individuals who are partners in partnerships.
  • C corporations will have to file by the 15th day of the fourth month after the end of the tax year. Thus, C corporations using a calendar year will have to file by Apr. 15 of the following year. In other words, the filing deadline for C corporations will be deferred for one month.

Please remember to get your partnership tax information to me in time to meet this earlier deadline.


Tax Developments in 2016

By Thompson Reuters

The following is a summary of some important tax developments that have occurred in 2016 that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Date extended for employers to claim revived work opportunity tax credit. The Code Sec. 51 work opportunity tax credit allows employers who hire members of certain “targeted groups” to get a credit against income tax. The credit was retroactively revived by the Protecting Americans from Tax Hikes Act of 2015. The previous transitional relief for eligible employers who want to claim credit has been extended. The transitional relief gives employers three extra months—until Sept. 28, 2016—to file the forms necessary to claim the credit for certain eligible workers. An employer that hires a member of a targeted group, including a long-term unemployment recipient, who begins work for that employer on or after Sept. 1, 2016, is not eligible for this transition relief with respect to any such new hire.

ACA premium credit and individual mandate 2017 indexing adjustment. IRS has provided indexing adjustments for the Code Sec. 36B premium tax credit and Code Sec. 5000A individual mandate (also called the individual shared responsibility payment) for 2017. These inflation adjusted percentages are used to determine whether an individual is eligible for affordable employer-sponsored minimum essential coverage (and so ineligible for the premium tax credit to help afford health insurance purchased through an Exchange) and to determine whether an individual is eligible for an exemption from the individual shared responsibility payment because of a lack of affordable minimum essential coverage. Taxpayers are not treated as eligible for employer-sponsored minimum essential coverage if their required contribution with respect to the plan exceeds 9.69% of the their household income for plan years beginning in 2017 (up from 9.66% for 2016). An individual is exempt from the requirement to maintain minimum essential coverage for a month in which the individual lacks affordable coverage—i.e., a month in which his required contribution (determined on an annual basis) for coverage for the month exceeds 8.16% of the individual’s household income for plan years beginning in 2017 (up from 8.13% for 2016).

Taxpayers can pay IRS in cash at 7-Elevens. IRS announced a new payment option for individual taxpayers who need to pay their taxes with cash. Under the new arrangement that IRS provides in partnership with ACI Worldwide’s and the PayNearMe Company, individuals can make a payment without the need of a bank account or credit card at over 7,000 7-Eleven stores. There is a $1,000 payment limit per day and a $3.99 fee per payment. Because PayNearMe involves a 3-step process, IRS urges taxpayers choosing this option to start the process well ahead of the tax deadline to avoid interest and penalty charges.

Court rules Obamacare reimbursements unconstitutional. A district court has granted summary judgment to the House of Representatives in their challenge to the funding of a health insurance providers’ reimbursements in the Affordable Care Act (ACA, i.e., Obamacare). While the ACA explicitly provides a permanent appropriation for the Code Sec. 36B premium tax credit, which makes insurance premiums more affordable for low-income taxpayers, such funding isn’t specified for the reimbursements of “cost-sharing reductions” by insurers that reduce deductibles, coinsurance, copayments, and similar charges in the qualified health plans they offer through an Exchange. The court found that the ACA impermissibly appropriated money for the reimbursements to insurers in violation of the Constitution, which requires that such monies can only be appropriated by Congress. The court enjoined any further reimbursements until a valid appropriation was in place, but stayed its injunction pending an appeal by the parties.

Social Security wage base could increase to $126,000 for 2017. The Social Security Administration’s Office of the Chief Actuary (OCA) has projected, under two out of three of its methods of forecasting, that the Social Security wage base will increase from $118,500 for 2016 to $126,000 for 2017. Based on the OCA estimate, on a salary of $126,000 (or more), an employee and his employer each would pay $7,812.00 in Social Security tax in 2017. Based on the OCA estimate, a self-employed person with at least $126,000 in net self-employment earnings would pay $15,624.00 for the Social Security part of the self-employment tax in 2017.

No deduction for clothing. The Tax Court held that a salesman for a major designer who was required to wear the designer’s apparel while representing the company couldn’t deduct the cost of such clothing as unreimbursed employee expenses. Clothing worn by a taxpayer in connection with his trade or business is generally nondeductible, unless:

1.  The clothing is required or essential in the taxpayer’s employment;

2.  The clothing is not suitable for general or personal wear; and

3.  The clothing is not so worn.  Here, the clothing was clearly suitable for regular wear.