Executives Dilemma; Funding for Children's Education or Funding Retirement Income

Tuesday, February 1, 2011
As educational costs continue to rise, executives call for options to provide for their children's college expenses without neglecting their own personal retirement goals.

American Benefit Corporation's Jim Herlihy has just released a new article on how executives can fund for their children's education and their own retirement with the same deferred compensation plan.

Frequently executives question how to accumulate enough money for retirement while having two children in top colleges that are costing $100,000 per year in after-tax tuition expense. The most tax efficient way to fund for both of these significant obligations is with a non-qualified deferred compensation plan sponsored by the employer that has in-service and retirement distribution options. However, the executive needs to begin participating and deferring income long before the education expenses are due.

Consider the executive currently age 40 with two children ages 8 and 10 who would like to retire at age 65 and is currently earning $500,000 per year. He should consider an annual pre-tax income deferral of $150,000, which in his 40% tax bracket will create a decrease in take-home pay of $90,000. He should anticipate making the deferral until he is age 65. Further, the annual deferral of $150,000 should be allocated among three separate deferred compensation accounts with the following allocations: (1) $23,493 per year to the education account of the 8-year old for 10 years, (2) $30,944 per year to the education account of the 10-year old for eight years, and (3) the balance of the $150,000 to the retirement account for 25 years. At a hypothetical 5% crediting rate and a 40% tax rate both education accounts will produce $50,000 after-tax between the children's age 18-22. The retirement income account will produce $439,411 before-tax at the executive's age 65 payable for 15 years. The retirement benefit can be increased by deferring the full $150,000 to the retirement account after the education accounts have been fully funded. This scenario does not deal with the inflation impact.

About Us

At American Benefit Corporation, we design, fund and manage executive non-qualified benefit plans for highly compensated corporate executives who wish to reduce current income taxes and form personal capital on a tax efficient basis. Established more than 30 years ago, we serve the unique needs of executives in numerous corporations with their personal capital formation objectives.

This material is intended for informational purposes only and is not intended to replace the advice of a qualified tax advisor. Investments in securities involve risks, including the possible loss of principal. When redeemed, shares may be worth more or less than their original value.;