TAXS Management

Obviously, nobody asked the marketing guys before coming up with this one. Who in the world thought up the name “non-qualified deferred compensation?” Oh, it’s descriptive alright. But who wants anything “non-qualified?” Do you want a “non-qualified” doctor, lawyer, or accountant? What’s worse is deferring compensation. How many people want to work today and get paid in five years? The problem is, non-qualified deferred compensation is a great idea; it just has a lousy name.

Non-qualified deferred compensation (NQDC) is a powerful retirement planning tool, particularly for owners of closely held corporations (for purposes of this article, I’m only going to deal with “C” corporations). NQDC plans are not qualified for two things; some of the income tax benefits afforded qualified retirement plans and the employee protection provisions of the Employee Retirement Income Security Act (ERISA). What NQDC plans do offer is flexibility. Great gobs of flexibility. Flexibility is something qualified plans, after decades of Congressional tinkering, lack. The loss of some tax benefits and ERISA provisions may seem a very small price to pay when you consider the many benefits of NQDC plans.

A NQDC plan is a written contract between the corporate employer and the employee. The contract covers employment and compensation that will be provided in the future. The NQDC agreement gives to the employee the employer’s unsecured promise to pay some future benefit in exchange for services today. The promised future benefit may be in one of three general forms. Some NQDC plans resemble defined benefit plans in that they promise to pay the employee a fixed dollar amount or fixed percentage of salary for a period of time after retirement. Another type of NQDC resembles a defined contribution plan. A fixed amount goes into the employee’s “account” each year, sometimes through voluntary salary deferrals, and the employee is entitled to the balance of the account at retirement. The final type of NQDC plan provides a death benefit to the employee’s designated beneficiary.

The key benefit with NQDC is flexibility. With NQDC plans, the employer can discriminate freely. The employer can pick and choose from among employees, including him/herself, and benefit only a select few. The employer can treat those chosen differently. The benefit promised need not follow any of the rules associated with qualified plans (e.g. the $44,000 for 2006) annual limit on contributions to defined contribution plans). The vesting schedule can be whatever the employer would like it to be. By using life insurance products, the tax deferral feature of qualified plans can be simulated. Properly drafted, NQDC plans do not result in taxable income to the employee until payments are made.

To obtain this flexibility both the employer and employee must give something up. The employer loses the up-front tax deduction for the contribution to the plan. However, the employer will get a deduction when benefits are paid. The employee loses the security provided under ERISA. However, frequently the employee involved is the business owner which mitigates this concern. Also there are techniques available to provide the non-owner employee with a measure of security. By the way, the marketing guys have gotten hold of NQDC plans, so you’ll see them called Supplemental Executive Retirement Plans or Excess Benefit Plans among other names.

Mr. Morris, a fee based Investment Advisor Representative with Raymond James Financial Services, Inc., helps 401k participants get the most out of their corporate plans.

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An Ira is one of the greatest ways to save on taxes currently and accumulate money for the future.

For individuals three types of IRA’s will normally come under consideration.

The Traditional or Regular IRA
The Education IRA
The Roth IRA

Education IRA is now called the Coverdell Education Savings Account (ESA).

Education IRAs allow you to save for qualified higher educational expenses for a beneficiary. Parents and guardians are allowed to make nondeductible contributions to an education IRA for a child under the age of 18.

Contributions are allowed prior to the beneficiary turning 18, and contributions may not exceed $2,000 per beneficiary per year.

Contributions are made with after-tax dollars. There is NO deduction for the contribution. Withdrawals, however, are tax- and penalty-free when adhering to certain rules.

The traditional IRA allows you to contribute an amount and take a current deduction for the contribution. Withdrawal minimums must begin at a certain age and all withdrawals are taxable at the rate applicable when withdrawals are made. The main benefit is that any growth or gains remain free from taxation up to the point of withdrawal. Thus you would be getting tax-free accumulation.

The Roth IRA is perhaps the simplest - and potentially the most effective - sheltered account available.

Roth IRA has a tax structure different from any other IRA: contributions are after-tax (no deduction is available) but growth is tax-free; AND once you put your money in you NEVER pay taxes again.

Additionally, unlike a regular IRA, a Roth IRA does not require that you
start withdrawing funds at age 70

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Would you like to receive 15% to 50% return on investment (ROI) guaranteed by the government? Tax lien certificates (TLC) offered in many states and counties in the U.S., U.S Virgin Islands and Puerto Rico offer returns that high. While most states offer less than 50% your investment may be safe because it is secured with real property. A TLC is a note issued by the county or municipality on properties that are in arrears with their property tax. Some states allow these notes to be senior to all other mortgages and liens, including federal tax liens. These notes are sold at auction by the individual counties, municipalities and/or states that issue them. Investors receive a fixed amount of interest monthly written on the note for a specific time period. This amount is state mandated. If the outstanding debt is paid before the term of the loan ends, the government will send the investor a check for the initial investment and all outstanding interest due. These note terms typically run for one to three years. If the property owner does not pay, you may have foreclosure rights; the government may send you the deed to the property. This means you may realize a huge ROI.

There is some risk involved with the purchase of TLC’s. The purchase of tax sale liens of properties under the control of Federal Deposit Insurance Corporation (FDIC) and those affected by the Drug Enforcement Administration (DEA), or if the owner files bankruptcy could possibly result in the loss of your investment. With due diligence, this risk can be reduced. Remember, not all TLC’s are equal, some are better than others. Sometimes you will have to fight it out in court with other lien holders if it gets to the foreclosure stage. Proper title and bankruptcy research should be done or your tax lien may end up worthless. Inspect the property to insure you are getting some value. I heard of a man in Texas who found the property the lien was written on flooded twice a year. His research saved his investment. Don’t trust the description of the property, have a look for yourself. TLC’s can be lucrative, but it may take quite some time to realize and you are sometimes responsible for the tax payments during the foreclosure. Again, do your research on the property, legalities and taxes.

Anyone who can legally own property in the U.S. may purchase a tax lien. These sales are conducted by lot for cash, either on the spot or within a time frame of within 48 hours. There may be a pre-registration requirement before the sale. There are also rules of sale to be studied. Online sales are available. This is a time, labor and money intensive investment that is best done locally. The sales and auctions vary widely state to state. More information is available from the county offices. A list of unsold TLC’s may be available from the county as well. Research of public records is to be expected for due diligence.

With three startup businesses before he was 21 years old, Matt Fox has the experience to help you create your own businesses for your financial future. See his blog at http://www.bizmaker.blogspot.com.

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