Background: A client with an annual personal income exceeding $500,000 was in the highest federal and state income tax brackets. The question became “if we could create a large tax deduction today, deferring income to retirement, would the client be better off?”
Our Case: The client was contributing the maximum allowed by the law of $59,000 (including catch-up) to her 401(k)/Profit Sharing Plan. She thought this was the most she could contribute so was resolved to paying 45-50% in taxes. After taxes and her cost of living, she was saving around $200,000 per year in accounts which had earnings also subject to tax! Creating what some call compound interest but what we call compound taxation.
The Question: Could we create a retirement plan that would allow for a larger tax deduction and not have to include all of her employees? Could we re-deploy the current accounts that she had accumulated with taxable earnings to accounts without taxation?
The Results: We had our Actuary design a Cash Balance Pension Plan in addition to her 401(k) Plan. This created a $200,000 tax deduction saving about $90,000 in tax. Through the use of pension rules, her other employees continued to receive their 401(k) benefits and three of her key employees also received about 10% of the $200,000 deduction.
Bottom Line: The client was surprised and pleased with what we had designed. Her prior advisor had never mentioned any of the tools we suggested. Best of all, we coordinated the Pension/401(k)/Profit Sharing with the change in current taxable investments to non-taxed growth resulting in her bracket dropping from the 45% tax range to the 30% tax range fully supporting her desired lifestyle during retirement.
This is a hypothetical example for illustrative purposes only. The experience of this client may not be representative of the experience of all clients and is not indicative of future results. Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as financial planner. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC. Financial Planning and Investment Advisory Services offered through B & E Investment Advisers, Inc., a State Registered Investment Adviser, Business & Estate Advisers, Inc., B &E Investment Advisers, Inc. and B&E Pension Advisers, Inc are separate entities from ValMark Securities.