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Tax Magic For Professionals And Small Business Owners

By: Frank Armstrong

It’s fourth quarter, which means it’s time to be thinking about what next year’s tax bill might look like. With itemized deductions for state and local  taxes and mortgage interest deductions pared, professionals and small business owners may be wondering if there are other legit ways to reduce the pain.

Perhaps up to a an additional $250,000 pension deduction might help. Oh, by the way, that could put another $2,500,000 in your retirement.

But, there’s more! If you are eligible to take advantage of the “pass through” savings for small businesses and professionals that might get your income down far enough to qualify.

Interested? Read on.

This particular magic happens when a cash balance plan is placed on top of a 401(k) pension/profit sharing plan for selected individuals.

Simply put, a cash balance plan is a cousin of the defined benefit plan with more flexibility. In some respects it looks somewhat like a 401(k) that you probably already have. It’s an additional qualified plan that generally sits side-by-side with a profit sharing/401(k) plan.

While the cash balance plan is a defined benefit plan, the participant will see an account much like  his/her 401(k) except that his/her contributions grow at a guaranteed 5%, and the participant does not exercise investment control. It’s all done for him/her.

Because a cash balance plan is a type of defined benefit plan, it greatly favors its older and higher-compensated participants. This makes it ideal for many  professional practices and small business owners.

The rules are complex. So, don’t try this at home. You will need highly qualified professional help. However, the design possibilities are almost endless. A talented adviser may be able to work economic miracles for you with this type of plan.

For instance, imagine a practice with five professionals all taking the same compensation. Three of them can opt out entirely, and the remaining two can decide on differing levels of deferral to meet their own personal situation and savings goals.

Time is growing short to take advantage of this for the 2018 tax year. Give your advisors time to do the right design job for you. The plan documents have to be filed before end of year along with a token deposit. But you don’t have to fully fund the trust until you file your taxes for next year.

There is a chance that your practice or business may not benefit at all. Or, perhaps a traditional defined benefit plan will work better for you in your situation.

Most reputable investment advisers or pension design specialists will happily “run the numbers” for you with no obligation.

When you see the costs and benefits laid out, you can determine whether it’s right for you. And if it’s right for you, it could be the silver bullet for your tax return.

Can We Help?

Investor Solutions advises pension plans with assets of over $200,000,000 and more than 2500 participants. We provide low cost solutions that improve employee outcomes, and reduce fiduciary liability, while generating substantial tax relief for key people through custom designs of 401(k), profit sharing, traditional pension and cash balance plans. These plans range from one person to several thousand participants.

Put our experience and expertise at work for you. Call Robert Gordon, MBA, CFP for a free no-obligation analysis of your plan and/or proposal for your professional practice or small business.