Minimizing Taxes By Maximizing Retirement Wealth

How the TCJA Law Affects High Income and Self-Employed Business Owners

The Tax Cuts and Jobs Act (TCJA) made several significant changes to the tax code. The law includes several aspects that affect high income small business owners and self employed individuals.
 
The tax law increases the value of high contribution retirement plans like Defined Benefit & Cash Balance plans, offering large “above the line” tax deductions for certain clients. Cash Balance and Defined Benefit plans can potentially bring your small business and self-employed clients below the taxable income thresholds ($326,600 married tax payer, $163,300 single tax payer in 2020) and save them tens of thousands of dollars in tax liability. In many cases, these deductions lower taxable income sufficiently to qualify the tax payer for the additional 20% deduction and even lower their tax bracket.

Sole Proprietor Opens Defined Benefit + 401(k) Plan to Build Retirement Wealth

With a DB + 401(k) Plan
Net Profit: $500,000
DB + 401(k) Contribution: $238,100
Qualified Business Income: $261,900
Pass-through Deduction: $52,380
Taxable Income: $209,520
$38,440 Tax Bill
$86,150 Tax Savings*
* Compared to no DB/401(k) and 199A deduction. Assumes estimated 31% federal and 6% state tax rates. This example is based on specific assumptions and is used for illustrative purposes only.
PROFILE

James, age 52, is married. He owns a successful financial advisory with no employees. James nets $500,000 (after paying self-employment tax) as an independent financial advisor and would like to retain more of his earnings.  

 

DEDUCTION

As an owner of a pass-through entity, the advisor could qualify for a tax deduction (Section 199A) of up to 20% of his Qualified Business Income if his income is below the $326,600 threshold for married couples.  

 

OBJECTIVE

Build retirement wealth while maximizing tax savings  

 

SOLUTION

Defined Benefit Plan and 401(k) for 10 years  

 

Do you have a high-income client like this?

 

  Learn More about Defined Benefit Plans


Small Business Owner Opens Cash Balance + 401(k) Plan to Maximize Tax Savings

With a CB + 401(k) Plan
Net Profit: $635,000
CB + 401(k) Contribution: $346,300
Qualified Business Income: $288,700
Pass-through Deduction: $57,740
Taxable Income: $230,960
$43,590 Tax Bill
$128,510 Tax Savings*
* Compared to no CB/401(k) and 199A deduction For Dr. Smith, a Cash Balance and 401(k) Profit Sharing Plan offers a tremendous amount of value both in retirement savings ($336,400 for her, $9,900 for the employees) and tax savings
PROFILE

Dr. Smith is 62 years old and married. She has 4 employees. She generates income through her business and is paid W-2 income. With a healthy income of $635,000 a year, Dr. Smith would be a suitable candidate to use a Cash Balance and 401(k) Profit Sharing plan in order to lower her taxable income  

 

DEDUCTION

As an owner of a pass-through entity, the doctor could qualify for a tax deduction (Section 199A) of up to 20% of her Qualified Business Income if her taxable income is below the $326,600 threshold for married couples.  

 

OBJECTIVE

Lower taxable income to maximize tax savings  

 

SOLUTION

Cash Balance with 401(k) Profit Sharing Plan  

 

Do you have a high-income client like this?

  Learn More about Cash Balance Plans


White Paper: Making the TCJA Law Work with High Contribution Retirement Plans

Our white paper highlights three aspects of the Tax Cuts and Jobs Act (TCJA) and how they affect tax and retirement planning for taxpayers with pass-through income. The white paper examines these three items:  

 

  • Tax Bracket Changes
  • Deductions Eliminated or Limited
  • Section 199A 20% Deduction for Pass-Through Businesses

Download Whitepaper


Ready to Talk?

Our Plan Consultants are ALWAYS AVAILABLE, even on weekends by appointment to help you help your clients. CALL: 866-269-2706 or contact us at DBPlans@dedicated-db.com when you have small business retirement questions.  

 

We are here for you.


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