When Should Your Clients Pay Their Income Taxes – 2014 or 2034?

2nd Oct 2014

irs logo
The IRS would like your clients to convert income to wealth. Really.

The IRS would like your clients to convert income to wealth. Really.

While some clients view government as an adversary, especially high-income people who have to pay a lot of taxes, the federal government is actually a strong supporter of building net worth. IRS Tax codes covering the majority of IRA, 401k, 403(b) and defined benefit plans encourage wealth accumulation through the deferral of taxes on income.

Self-employed high-income people (HISE), in particular, have some generous options.  They potentially can contribute $100,000 or more annually with tax advantaged retirement programs like our defined benefit plan,  moving that tax obligation off until the money is withdrawn, possibly decades from now. Rather than see their current year tax bill grow, they can build their net worth more rapidly.

If your clients are a high-income, self-employed individuals or couples, the math gets pretty compelling:

2014 Declared Income: $450,000
Marginal Federal  (Top) Tax Rate: 39.6%
2014 Tax Obligation (assuming combined federal and state tax rate of 38%) $171,000
Contribution to Tax-Advantaged DB $150,000
Taxes Deferred $57,000
Revised 2014 Tax Obligation (assuming 38% tax rate) $114,000


Some FAs report to us that they get a client’s attention by saying “the government is willing to offer you an interest-free loan of about $40,000, payable during retirement.” (This assumes income and tax rates remain the same.) The extra kicker is: If those future distributions in retirement fall into a lower tax bracket, some of that “interest-free loan” is never paid back because of the lower tax rate!

The only cash flow reason not to take that deal is if your client needs to spend all or some of that final $150,000 in income this year, or they are saving up for a big purchase (a second home or commercial real estate?).

That’s a question we cannot answer. But you can because you know, or can ask about, your clients’ plans.

The greatest value of a high income is the comfort it can provide today, but the second greatest value is the comfort it can build for clients in retirement, especially when the government is pitching in to help.

Is this a positioning you find useful when working with clients to increase the rate at which you can help them convert their income to wealth?

Dedicated DB@ DedicatedDB

Here are 6 tips to help you plan for retirement via @CNBC #retirement #retirementplanning https://t.co/tD0c161gmR

8:35 PM 19 April 2019

Dedicated DB@ DedicatedDB

Looking for a tax deduction? See how much you can save with our free Defined Benefit calculator #definedbenefithttps://t.co/uwc1ckzVDC

7:34 PM 19 April 2019

Dedicated DB@ DedicatedDB

A 25-year-old YouTuber quit her day job and now makes 6 figures recording herself eating via @money #youtuberhttps://t.co/4BH5ZaL5Nq

5:14 PM 19 April 2019

Dedicated DB@ DedicatedDB

11 strategic topics to discuss at your next meeting with your financial advisor via @forbes #advisorshttps://t.co/Q1ulizP44R

4:15 PM 19 April 2019

Dedicated DB@ DedicatedDB

Financial advisors are innovating their practices too slowly and that may have negative implications for their grow… https://t.co/8JaWYTFuzp

8:55 PM 18 April 2019

Dedicated DB@ DedicatedDB

2019 PR trends are affecting high-income PR professionals, who are opening Defined Benefit plans #PRhttps://t.co/fQDGQILpEF

5:30 PM 18 April 2019

Estimate contribution and deduction with our DB calculator Try it now

Send this to a friend