To Reduce or Eliminate Income Taxes and Increase your Retirement Income . . . even tax-free!
Tax-qualified Retirement Savings Plans are now Business Owner Friendly.
The Pension Protection Act of 2006 (PPA) has to be the best piece of retirement planning legislation passed in decades. Why? Because of its many attributes that make both Business Owner/Plan Sponsor, and Trustee Fiduciary friendly. Here’s a short list of what I’m talking about:
- Higher Tax-deductible contributions. Some business owners can contribute over $1 million to their tax-qualified plan!
- Reduced quarterly income tax estimates.
- Lower plan costs for employee participants.
- Tax-free Retirement Income planning.
- Tax-free Plan benefit payouts.
- Fund a Buy/Sell agreement or Stock Redemption.
- Plan security AND lower fiduciary risks.
- Charitable Giving without tax-deductible limitations.
. . . But there are more “Friendly” Benefits!
The PPA allows Business Owners to Custom Design their tax-qualified plan. Gone are the days of the “cookie cutter” 401(k)/Profit Sharing plan with its high costs and limited contribution amounts. For many business owners, it’s simply not enough to secure a long-term retirement, especially if they’re nearing retirement and haven’t saved enough.
Here’s what can be included in a custom designed 401(k) Plan with all contributions fully income tax-deductible:
- Defined Benefit Pension Plan.
- Roth 401(k).
- 401(h) – an account for retirees that grows tax-free and allows tax-free withdrawals for the reimbursement of out-of-pocket healthcare expenses not covered by a Federal or State program.
- Life Insurance – tax-free withdrawals for retirement income, as well as the death benefit to beneficiaries that’s income tax-free.
Higher Tax-Deductible Contribution Maximums.
By including a Defined Benefit Plan to your 401(k), the tax-deductible contributions can easily reach, or exceed, $1 million annually.
The addition of a spouse may even double the other wise maximum tax-deductible contributions. It’s called a Super 401(k) Plan™
For the year 2020, compare the contribution amounts for the standard off-the-shelf “cookie cutter” versus the Super 401(k), and see for yourself:
Age 401k P/S Super 401k™ Yr. 1 Double-up*
60-68 $26,000 $63,500 $422,000 – $482,000+ $979,500 – $1.25MM
55-59 $26,000 $63,500 $343,000 – $405,000+ $741,500 to $908,000
50-54 $26,000 $63,500 $272,000 – $329,000+ $626,500 to $715,000
45-49 $19,500 $57,000 $220,000 – $255,000+ $506,100 to $590,000
40-44 $19,500 $57,000 $190,000 – $212,000+ $410,000 to $482,000
*Double again with Spouse
Super 401(k) Plan™ contributions can be doubled in the 1st tax year [IRC §404(a)(6)]. Subsequent plan year contributions to the Double-up will be approximately 60% of the Double-up.
. . . Even Better news for Owner(s), Partners
It’s not unusual for some 401(k) plan designs to allow the business owner(s), partners to receive 80% – 95% of all plan contributions. In other words, the remaining 5% – 20% is what is available to the employee participants.
Translation: The Plan benefits the Business Owner not the employees as in a stand alone off-the-shelf “cookie cutter” plan.
Is it too good to be true?
It seems like with all the benefits and advantages I’ve mentioned, and there are more that’s beyond the scope of this post, there has to be some element of risk or downside?
If you adopt a pension plan, it must be funded every year. At the latest, you can fund this on the extension date of your income tax return; however, the company investing the funds must receive the money on or before that date or there are penalties due by the Internal Revenue Service.
From personal experience, my clients have truly benefitted both personally and corporately. They have even added value to their business.
So, who’s the Ideal Super 401(k) Candidate?
- Owners/Professionals seeking a higher contribution/tax deduction than the traditional 401(k) profit sharing maximum contributions limited to $57,000 to $63,500.
- CPAs and CPA Firms
- Attorneys and Law Firms
- Physicians and Medical Groups and Professional Firms
- Highly profitable companies of all types and sizes
- Older Owners who need to squeeze 20 years of retirement savings into 5 to 10 years.
- Owners/Partners looking for a way to fund a buy-sell or stock redemption agreement on a tax-deductible basis.
- Wealthy Owners and Professionals with Charitable Giving intentions stymied by the limitations on tax deductibility.
Contact me, Rick English. In just a few short minutes I’ll help you determine if a custom designed tax-qualified plan is suitable for you.