A Little Known Retirement Plan That Saves Big on Taxes
30th Jun 2020
Profitable small business owners may be surprised to know that they could save thousands on annual taxes with a relatively unknown retirement plan – a Defined Benefit plan. While these high-contribution pension plans are not new, advisors sometimes need to be reminded of the plans’ advantages as well as the types of clients who are best candidates. A recent Forbes article How Defined Benefit Plans Lower 2020 Taxes drives this point home. And it couldn’t have come at a better time for business owners seeking tax benefits during a challenging year.
Hold onto Earnings
In the wake of the COVID-19 pandemic, some businesses may be not be earning as much money, making it even more critical for them to hold onto as much of their earnings as possible – and lowering one’s taxable income may have a compounded benefit to boot. Then there is the issue of retirement. Many high-income small business owners don’t save enough for retirement because they are focused on investing in their business and making it grow.
Fortunately, a Defined Benefit plan is a catch-up solution that can lower taxes and fund a retirement account. These plans are designed to reduce taxes and build wealth for the future. Depending on the owner’s age and number of employees, the client may be able to contribute $100,000 or more a year into a Defined Benefit plan and significantly reduce taxes. Plus, these contributions are fully tax-deductible.
Clients Missing Out on Tax Savings
Many CPAs don’t recommend this tax-advantaged retirement plan – and their clients are missing out on a tax relief opportunity. Financial planner David Rae makes note of this and the benefits of this retirement plan in the Forbes article:
“Business owners who feel like they are behind when it comes to retirement planning can reduce their tax liability, and play catch up on their retirement savings, by adding a Defined Benefit Pension Plan on top of a Profit Sharing 401(k) plan.” Rae continues, “With potential tax savings north of $100,000 per year, it amazes me that more financial advisors are not discussing this valuable retirement planning technique with their clients. I am going to go out on a limb and guess neither your CPA nor Financial Planner has never mentioned setting up a Defined Benefit plan to you.”
Read David Rae’s full article How Defined Benefit Plans Lower 2020 Taxes to learn more about how a Defined Benefit plan could potentially save business owners hundreds of thousands of dollars.