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Self-Employed? Use This One-Two Punch for a Massive Tax Deduction
Successful self-employed professionals and small business owners, thanks to the new tax law, have the opportunity to cut tens of thousands of dollars from their tax bill using the strategy described below. But those interested need to move quickly, for things must be set up by December 31, 2018—and they cannot be done at the last minute.
How Can a DB Plan Help You?
Let’s say a successful independent lawyer or real estate professional has income of $415,000. If he or she were to make a $100,000 tax deductible contribution to a defined benefit plan, then taxable income would be down to $315,000. $315,000 is the highest level of income to maximize the new 20% 199A Qualified Business Income “pass-through” deduction. Thus, there is a 20% tax deduction applied to the $315,000, leaving $252,000 of taxable income.
By using this strategy, our professional’s taxable income dropped from $415,000 to $252,000, resulting in tax savings of $57,050 (assuming a 35% rate) on his or her 2018 tax bill.
Were it not for the defined benefit plan and its very high allowable contributions, our professional may have had no means to reduce his or her taxable income low enough to take advantage of the 20% 199A pass-through deduction.
Too Good To Be True?
When we first start going into the details of defined benefit (DB) plans with people who are good candidates for them (individuals who have high income from self-employment), we often run into some skepticism. How, they ask, can it possibly be legal to make a $100,000+ tax-deductible contribution to a retirement plan and thereby save up to $40,000 in taxes annually?
Well, it is possible and it is legal, and individuals with high income from self-employment would be wise to familiarize themselves with the potent tax advantages that DB plans offer. In fact, people that are good candidates for DB plans but that are not currently contributing to one are probably paying tens of thousands of dollars more in tax each year than they need to.
Defined benefit plans have been around for decades and are IRS-approved. In many ways they are like Individual 401(k) Plans on steroids. They are perhaps the most powerful financial tool for high-earning self-employed individuals looking both to save on taxes and to rapidly build a large retirement nest egg. If you are one of the lucky 2% of the population that can take advantage of a DB plan, you should give it serious consideration.
Will a DB Plan Work For You?
Is a defined benefit plan right for you? We only need a few pieces of information about your situation to generate a complimentary tax-savings proposal for you. There is no cost to you for this service and no obligation whatsoever. If you do find that a DB plan works for your situation, you will have to move quickly if you want to save on your 2018 tax bill. Plans must be established by December 31 of the year for which contributions are made. However, it takes time to create the plan documents, and pension administrators are incredibly busy in the last couple months of the year.
Contact us directly at thoms@orioncapitalmgmt.com or 619-435-1701 to find out more.
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Peter Thoms, CFA, MBA