Handling 3 Types Deferred Compensation in TOTAL Planning Suite

1. Defined Contribution

2. Defined Benefit

Add an asset with its current balance in the Asset section and set the employee and employer contributions to the plan.

The client’s contribution to the plan is automatically treated as an adjustment to income for the tax calculations.

Capture the defined income stream received at retirement in the Income section under the Pensions tab.

No tax benefits are available to the client.

3. Employee Contribution to a Defined Benefit Plan

For this type of plan, we need to capture the deferment of income, the tax benefit, and the future income stream.  A few options are available to capture all the pieces.  Here are two most common methods and an image of the data entry for the example client.

Example:  The client is a teacher at a public school who earns $45,000 and is required to contribute 6% into the Public Employee Retirement System.  The state also contributes 6%.  The client will receive a defined benefit pension upon retirement.

Method 1 (Simplest)

Capture the future income stream by entering the defined pension benefit in the Income section under the Pensions tab.

Reduce the client’s “Salary and Wages” by the amount the client is contributing to the plan, in the Income section, earned income tab. Make sure to reduce both the “Tax $” and the “Cash Flow $” columns, to ensure the contribution to the plan reduces available income for spending, and income for tax purposes.

Method 2 (Most Accurate)

Again, capture the future income stream by entering the defined pension benefit in the Income section under the Pensions tab.

Manually add the adjustment to the clients taxable income in the Tax Data section, under  the  Tax Data tab.  Use the line item “Adjustments to Federal Income” and enter a negative dollar amount equaling the client’s annual contribution to the plan under the “Tax Report” column only.  If you are using Golden Years, use the age change table below to stop this adjustment upon the clients retirement age.  This provides accurate taxation of payroll taxes (FICA and Medicare).  Method 1 reduces the amount taxable income, but also reduces the salary and wage income subject to payroll taxes.

Last, add the expense of the client’s contribution to the pension plan under the Personal Expenses section.  Add a new line item, with an appropriate description and dollar amount.  Make sure this expense is only picked up for current age, and not for retirement age.