We Have the Antidote for Tax Payment Shock

24th Feb 2015

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Pay now, or in a couple of decades?

A few tips from you early in the year could help your high income clients pay themselves at tax time next year — instead of the IRS! Your self-employed clients probably have access to the best available tax-advantaged savings plan in the U.S.: Micro-Business Defined Benefit Plans (DB Plans.)

And word is getting out about this, so get out in front:

Our Plan Design Consultants spoke with over two thousand advisors, CPAs, and high income clients about retirement plans in the fourth quarter of 2014. They come to us looking for retirement plan solutions that can really impact their tax liabilities. Defined benefit (DB) plans and/or solo 401(k)s potentially allow the largest contributions and tax deductions for their clients — or for themselves —

WARNING: The wrong moves early in 2015 can get in the way of qualifying for a DB Plan this year. Take these preliminary steps to set your client up for the best possible plan:

1. Do Not fund SEP accounts for 2015

If your client is expecting high income this year and wants to put away as much as possible, call us first to calculate how much they can contribute to a DB plan. Add phone number: 866-269-2706

Most SEP IRA documents prohibit contributing to other plans. We had a number of FA clients who had funded SEPs in 2014, and were not able to take advantage of the potentially higher DB tax savings. Several of them are opening defined benefit plans in 2015 to capture those extra savings.

Call our defined benefit specialists to determine in just minutes whether your client might be able to benefit from opening a DB plan this year.

2. Hold Off on Profit Sharing Contributions to Maximize Savings

It sounds counter-intuitive but if your client fully funds the profit sharing portion of a 401(k)/PS plan, the amount they can contribute to a DB will be limited. The better strategy: estimate the DB first, and then combine it with a 401(k)/profit sharing plan.

Clients can take full 401(k) salary deferrals — up to $18,000 in 2015 (plus $6000 more if over age 50). But instead of 25% profit sharing they are limited to 6%. While the average contribution to a DB plan was $125,000, in 2014, about 30% of our DB clients opened combo plans which raised their combined contribution to well over $200,000 for a one person retirement plan! 

3. Start Playing with the Numbers Now

We talk to advisors and clients all year long. We’ve found that the more time the client has to understand how a defined benefit plan works, the easier it is for them to find a comfortable contribution level. When you and your client consider a defined benefit plan, you’ll be touching on cash flow planning, retirement catch-up needs, and other retirement accounts they could consolidate with you. If they have major purchases planned, they can still get the 2015 tax benefit but put off funding until they file their taxes in 2016. If they are trying to “catch up” for retirement, the sooner they start, the better they’ll feel. Try a sample illustration now.

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Want to learn more before you start? Give us a call at 1-866-269-2706 or sign up for our weekly webinar.

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