If you were a fan of HBO’s “Six Feet Under”, you know that funeral homes often are small businesses involving family members and/or a few other employees. These businesses can be making considerable income. Recently we helped a financial advisor in Indiana open a Cash Balance Plan for a funeral home. The business is owned by a couple in their early 50’s who have two employees in their 40’s. The company already had a Safe Harbor 401(k) and the couple wanted to start contributing more toward their own retirement but didn’t know that other options were available to them. Although we ran several scenarios in which the owners, Mr. & Mrs. A., could contribute as much as $200,000, they were more comfortable starting with a smaller commitment in 2016 with the intention of increasing it for 2017. By contributing less than $1500 for each of their employees to the Safe Harbor 401(k)/Profit Sharing plan, the owners can still contribute $60,000 to a Cash Balance Plan for themselves, make salary deferrals of $42,000, and receive profit sharing of $2000 bringing the business’s total 2016 contribution to $107,000 of which 97% is for the owners. Because the plans were designed with growth in mind, Mr. & Mrs. A. can increase the $60,000 contribution up to $125,000 in 2017 without amending the plan.
Developer Doubles Down
Developer in Northern California has had an S-corp. for the past three years, with steadily rising income. He’s been able to contribute as much as $53,000 in a SEP for the past few years and wants to save much more going forward. This year, he’ll pay himself $265,000 in W-2 and contribute $83,400 to a OnePersonPlus DB and $33, 900 to a OnePerson (k). Next year, if his income declines due to fluctuations in the market he will reduce the amount he contributes to the 401(k) or not fund it at all.
Ophthalmologist Sees His Way
Dr. C, age 58, and his wife have a thriving practice with three additional employees. We designed an OwnersPlus Cash Balance + 401(k) program that he will contribute to until he retires, in about five years. The practice will contribute almost $300,000 a year of which 98% will be on behalf of Dr. C and his wife. This should save the couple over $100,000 in current year taxes each year. Upon retirement or plan termination, the couple’s assets will roll into an IRA and continue to grow tax deferred until withdrawn.
Advisor Takes Advice
Before he would recommend a defined benefit plan to his clients, a Michigan-based advisor decided to try one for his own sole proprietorship. On earned income approaching $500,000, he decided to contribute $120,000 a year to a plan. Now he’s ready to introduce the plan to two high income clients who are good prospects for a defined benefit plan.
When the whole family works together, huge contributions are possible. This S-corporation consists of a married couple in their mid-fifties who pay themselves $220,000 and $210,000 in W-2, their two young adult children, who each earn $45,000 and no other employees. We designed a defined benefit and 401(k) solution that allows the business to make tax-deductible contributions exceeding $500,000 for the four of them each year, the majority for the parents. When the parents gradually turn the business over to their children, they will have already put away enough to secure their own retirement.
Professor's New Gig
Former Economics Professor, age 71, is now consulting and helping a financial advisor build his business. He expects to make $125,000 this year from the consulting, on top of his pension and doesn’t need the consulting income for the near term. We opened a defined benefit plan for him with an annual contribution $100,000 which he expects to be able to fund for five years. The plan was set up with a three-year vesting schedule so that he doesn’t have to take Required Minimum Distributions (RMD) for the first three years.
Guiding big container ships into ports can be lucrative. Mr. B., age 66, has an S-corporation and pays himself about $300,000 a year. He has no employees. Because of his age and income, with a combo OnePersonPlus DB plan and a OnePerson (k), he’ll be able to make tax-deductible contributions of $251,000 to the DB and $37,000 to the “k” for 2016. After five years, he will accumulate $1.5 million in the DB plan alone.
Acupuncturist Stimulates Tax Savings
The wife of a corporate executive earns over $100,000 a year as an acupuncturist working out of their home. They don’t need her income at this time. Because she is 60 years old, she is able to put 100% of her earnings into a Defined Benefit plan for the next five years. Estimated tax deferrals: $38,000 a year.
Astronaut Has Astronomical Savings
Retired astronaut began new career at age 52 as public speaker and writer. Though he’s come down to earth, his new Defined Benefit + 401(k) retirement program is just taking off. In 2016, he’ll start to contribute $179, 400 in the DB and another $39,900 to a OnePerson(k). Over the next 10 years, if he sticks with his plan, he will accumulate $2.5 Million in the DB plan alone.
Tax Attorneys Get Big Returns
A married couple in their early 60’s has built up a successful tax law practice. They plan to work at least another 5 years and want to use the intervening years to maximize their retirement savings. In 2016, they increased their W-2 to pay themselves $265,000 and $235,000. Although they have 3 employees, ranging in age from 29 to 46, we were able to design a combined Cash Balance and Safe Harbor 401(k) program that provides 99% of the contribution for the owners. Each year, if their business situation remains the same, they will be able to put $460,000 toward their own retirement and just $5,700 total for their employees. They know tax law — we estimate they will save themselves $176,000 in current year tax liabilities.
Chef Puts It All Together
A celebrity chef and cookbook author in his mid-40s makes over $1.5 million from royalties and endorsements. He has no full-time employees so the full benefit of his plan will go to him. Even though he’s young, he’ll be able to contribute $113,000 annually to a combined defined benefit plan and a one person 401(k). The contribution is a deductible business expense which will reduce his tax liability by about $43,000 for 2016.
Hair Raising Savings for Surgeon
A Registered Investment Advisor in the southeast is working with a hair transplant surgeon, Dr. V., age 55, who has four employees ranging in age from 25 to 49. The doctor has an S-Corporation and pays himself $265,000 in W-2 (which is the maximum compensation that we include in calculating his contribution in 2016). His four employees earn total compensation of $245,000. The doctor will contribute $143,000 to a Cash Balance Plan for himself and only $5,400 in total for the employees. In addition, Dr. V. can defer $24,000 into a Safe Harbor 401(k) for himself, and make profit sharing contributions of $12,250 total for the employees and another $18,250 for himself. In total, he will be adding $185,000 to his own retirement each year and deferring an estimated $77,000 in taxes.