Taxes Defined Benefit Plan

Trump’s Tax Plan: How it Increases the Allure of Defined Benefit Plans

For self-employed individuals with high income, the defined benefit plan is the gold standard of retirement plans.

Defined benefit plans permit owners to sock away much more pre-tax money each year than SEP-IRAs or 401(k)s, thus providing much higher annual tax savings.  Some defined benefit plan owners make tax-deductible contributions in excess of $100,000 or more per year, thereby cutting their tax bills by more than $35,000 annually. 

For a review of the basics of defined benefit plans, please visit: Defined Benefit Plan Solutions

While Trump’s tax plan is far from becoming law, one of its proposed provisions will, if enacted, make defined benefit plans an even more powerful retirement tool for many high-income self-employed individuals.  The President’s proposal to eliminate the federal deduction for state and local taxes will, if it comes to pass, hurt high-income taxpayers in high-tax states like New York and California that itemize their deductions.  With state and local taxes no longer eligible to be deducted from taxable income, these taxpayers will be in serious need of different (and higher) deductions to take against their taxable income:  enter the defined benefit plan. 

For high-income self-employed individuals, taxes are usually their single largest annual expense—and their retirement plan contribution is (potentially) their single largest tax-deductible business expense.  And in the pecking order of retirement plans, it is the defined benefit plan that has by far the higher contribution limits—much higher than the SEP-IRA or 401(k).  Defined benefit plans do not work for everyone, but for those in the right circumstances they can be very powerful tax-cutting tools.  In 2017, many people with defined benefit plans will make tax-deductible contributions in excess of $100,000 or more, and thereby chop $35,000 or more off their tax bill.  SEP-IRA and 401(k) contributions, meanwhile, are capped out at $54,000 for 2017 (or $60,000 if over age 50).

Self-employed people with the following characteristics are usually good prospects to set up defined benefit plans.

  1. Are independent contractors or own their own company
  2. Have high income from self-employment
  3. Have few to no employees
  4. Have few deductible expenses
  5. And pay a high rate of tax on their income. . .

Dates to Remember

The most important date for those considering establishing a defined benefit plan for 2017 to keep in mind is December 31, 2017.  This is the deadline by which a defined benefit plan has to be established in order for it to be able to receive tax-deductible contributions for tax year 2017.  The plan does not need to be funded, however, until the individual’s (or company’s) filing deadline, including extensions.

It is a good idea to get a plan in place early, as many pension administrators are very busy in the final months of the year.  In our view, it is prudent for defined benefit plan applicants to get their plans established by October 1, 2017 to get ahead of the year-end rush.

If you would like to see the tax-saving potential you might have with a defined benefit plan, provide us the following few pieces of information and we will generate a complimentary tax savings proposal for you within 48 hours.

Your Name

Your Age

Your Company Name, Entity Type and Date of its inception/incorporation

Annual Income (both gross and W-2)

Number of employees

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Peter Thoms, CFA, MBA

Peter Thoms, CFA, MBA

Peter Thoms, CFA, founded Orion Capital Management LLC in April 2002. Peter has extensive experience managing investment portfolios for clients pursuing a wide range of financial goals.

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