Minimizing Taxes By Maximizing Retirement Wealth

How the New Tax 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 new law includes several aspects that affect high income small business owners and self employed individuals.

 

The new 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 ($315,000 married tax payer, $157,500 single tax payer) 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
$38,860 Tax Bill
$87,520 Tax Savings*
* Compared to no DB/401(k) and 199A deduction
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.

 

NEW DEDUCTION

As an owner of a pass-through entity, the advisor could qualify for a new tax deduction (Section 199A) of up to 20% of his Qualified Business Income if his income is below the $315,000 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: $620,000
CB + 401(k) Contribution: $308,920
Qualified Business
Income:
$311,080
Pass-through Deduction: $62,210
Taxable Income: $248,870
$48,310 Tax Bill
$120,470 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 ($298,136 for her, $10,784 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 $620,000 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
 

NEW DEDUCTION

As an owner of a pass-through entity, the doctor could qualify for a new tax deduction (Section 199A) of up to 20% of her Qualified Business Income if her taxable income is below the $315,000 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 New Tax Law Work with High Contribution Retirement Plans

Our white paper highlights three aspects of the tax law 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
  • New 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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