Retirement plans are smart investments, but many business owners qualify for advanced plans, which can yield tax savings of more than $100,000 per year. A well-designed retirement plan is a powerful asset, but few understand their potency in tax planning and liability mitigation.
The Dilemma for High-Income Earners
If you’re a business owner, realtor, doctor, high-level executive, or other 1099 earner, your scenario can go something like this:
Income taxes take nearly 50% of your hard-earned money, your nest egg grows too slowly, and you’re afraid you won’t be able to save enough to retire with the funds needed for the life you deserve.
The number one compliant of high-income earners is income taxes and typically, the “standard” tax deductions just aren’t enough to build the wealth you desire or phase out at certain levels.
The Power of Cash Balance Plans
Cash balance plans are defined benefit (DB) retirement plans with features that resemble a defined contribution (DC) or 401(k) plan (also known as a hybrid plan). These plans may be sponsored by both single-person business owners and large corporations.
Their primary benefit is allowing higher retirement contribution amounts compared to a 401(k) plan (e.g., $19,500 for 401(k) deferrals and up to $58,000 with the inclusion of a profit sharing plan for 2021). Contributions inside a cash balance plan can reach up to four times what traditional retirement plans offer, some in excess of $250,000, which can offset taxes on a dollar-for-dollar basis.
Let’s take a look at two examples:
Example 1 (No retirement plan):
A married anesthesiologist making $500,000 per year and does not have a retirement plan.
He may pay $14,500 in self-employment taxes and receive the standard marital deduction of $24,000. This reduces his AGI to 467,150, leaving him with an estimated tax liability will be $205,860.
Example 2 (Has a 401(k) along with a cash balance retirement plan):
A married anesthesiologist makes $500,000 per year and DOES have a retirement plan.
In this instance, he will still have the $14,500 self-employment tax and $24,000 marital offset. But by layering on a cash balance plan, he can contribute up to $261,500 to his retirement.
Remember, retirement plan contributions lower your taxable income. So, this doctor has lowered his AGI and dropped one tax bracket. This reduces his AGI to $224,000. This brings his estimated tax liability to $76,725, saving over $125,000 in taxes.
In this instance, his income was brought down by his contributions, qualifying him for an additional tax dedication called the 199A deduction.
This clearly demonstrates the advantages of how retirement plans help mitigate your tax liability.
In addition, if he continues to make annual contributions of $261,500, in as little as five years he can grow a nest egg of over $1,400,000.
If you’d like to speak with an expert about your retirement planning needs, please call 855-774-6340 or email sales@wealthprime.com.
ABOUT THE AUTHOR
Dan Harding is the founder of WealthPRIME. WealthPRIME helps high-net-worth individuals and investors with tax mitigation, wealth enablement, and retirement planning.
