What is a Private Retirement Plan, or PRP? | TRUST-CFO®

What is a Private Retirement Plan, or PRP? (part 2 of 3)

Private Retirement Plan

What is a Private Retirement Plan, or PRP?

Private Retirement Plans in California: The Difference between Private Retirement Plans and Tax-Oriented Retirement Plans

Now that you understand the basic principles of a Private Retirement Plan (PRP), let’s take a closer look at the inner workings and advantages of a PRP.

Under California law, “private retirement plans” include, but are not limited to:

  • Union retirement plans
  • Profit-sharing plans that are designed and used for use in retirement
  • Self-employed retirement plans

The self-employed exemption, however, is very limited. The plan will only qualify to the extent that it is “necessary to provide for the support of the judgment debtor” and must qualify under California’s Employee Retirement Income Security Act (ERISA).

As we covered in Part 1 of our PRP series, traditional retirement plans are primarily funded by allocated assets and funds that seek large tax benefits. As a result, with this form of retirement planning, you will face restrictions on:

  • What type of assets can be contributed.
  • The amount of funds that can be contributed.

If you have a high-income level, this can severely limit your retirement savings because you will be capped on how much you can contribute to your retirement savings and you may not be able to save enough money through your IRA, 401k, or any other tax-deferred vehicle to support your lifestyle in retirement. 

PRPs, on the other hand, allow you to deposit any private or appreciating asset, including those with inherent tax benefits. You can make contributions to your PRP with little to no restrictions including:

  • Private business interests and stock
  • Private equity
  • Contracts
  • Receivables
  • Real estate property
  • Promissory notes
  • Private investment portfolios
  • Private life insurance
  • Private annuities
  • Death benefits

Why aren’t PRP contributions tax-deductible?

Contributions to PRPs are not tax deductible because the assets contributed to a PRP for use in retirement have already been taxed. However, although they are not tax deductible, contributions retain their full character once contributed to your PRP, preserving the inherent tax benefits in each asset for your benefit during retirement.

Since PRPs are tax-neutral, they allow participants to retain and enhance ongoing tax benefits of active assets, including harvesting business tax credits that eliminate tax, not just defer them.

How do PRP distributions work?

 Similar to more traditional retirement plans, your PRP distributions are based on the plan designed by the participant-beneficiary and the plan administrator. Capital payouts have the added benefit of tax neutrality without any need for unnecessary re-characterization. All plan distributions retain full creditor exemption, if properly administered. Any plan loans prior to formal benefit payouts are fully secured by the PRP and are therefore protected from creditor attachment. Additionally, unlike traditional retirement plans, all proceeds paid to designated beneficiaries from a PRP are protected against creditors and judgments.

Are PRPs a safe way to protect your wealth?

PRPs are the safest form of protection for your financial success in retirement. Perhaps the most valuable benefit of a PRP is that it is completely protected from bankruptcy and exempt from judgments, if properly administrated. With an unmatched level of protection from creditors and lawsuits, and a degree of freedom in how your plan is constructed that is not found in traditional tax-oriented retirement plans, PRPs are the safest and most advantageous option for retirement planning. 

In the next part of our PRP series, we will discuss the functional details of a PRP and the best way to ensure the security of your retirement savings with a properly constructed PRP.

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