As a financial advisor, retirement planning and tax planning are two of the things at the top of your priority list. You want to help your clients take advantage of every opportunity available to grow their wealth and keep as much of it for themselves as possible.
One great way to tackle both retirement planning and tax planning for your business owner clients is by having them sponsor a pension plan. While a 401(k) may be the first thing that comes to mind when you think of a small business pension plan, their low contribution limits keep them from being able to make much of an immediate impact. For high-earning professionals, there’s another pension plan far superior to the 401(k) for both tax and retirement planning.
The Rich Man’s Pension Plan: Cash Balance
Cash balance plans are a type of defined benefit pension plan that enable wealthy business owners to save up to hundreds of thousands of dollars pre-tax for retirement. Lawyers, doctors, and small business owners with substantial self-employment income are ideal candidates for a cash balance plan. When combined with a 401(k) profit sharing plan, there is no better way to set aside large sums of money for retirement.
Contribution limits are based on age, so your younger clients may only be able to set aside $100,000, but those over 60 could potentially contribute over $300,000. Also, contributions must be made for employees as well, but the vast majority of the money usually ends up going to the owner.
Money For Retirement, Tax Savings Today
It’s great to be able to put aside a lot of money for retirement, but the benefits do not stop there. Doing so can also help your clients save on their taxes now. The Tax Cuts & Jobs Act that went into effect for 2018 offers a 20% tax deduction for qualified business income. However, not everyone can take it.
Those in specified service businesses, like many of your professional clients, are ineligible for the 20% deduction once they pass certain income thresholds. The phase-out for eligibility begins at $315,000 in income for married couples and $157,500 for singles. Having an income above those levels will cost your clients the deduction, raising their tax bill.
Contributing to a cash balance plan can lower your clients’ income and make them eligible for the 20% qualified business income deduction. If a married couple earning $600,000 can lower their income to $315,000 by contributing to a retirement plan, they can bring their top tax rate of 37% down under 30% with the deduction.
Act Now: 2018 Isn’t Over Yet!
While cash balance pension plans have been steadily gaining in popularity, the new tax laws have created a new surge in demand for them. Luckily, 2018 isn’t over yet, so there is still time to start one before the year is over.
It takes some time, but if you contact FinancialFocus Retirement Plan Services this week, we should be able to set up your clients with a cash balance plan before year-end. And it’s okay if they don’t have thousands of dollars lying around to fund it. They have until they file their taxes in 2019 to make their 2018 contributions. If you have a client that could benefit from sponsoring a cash balance plan, email me today at email@example.com.
About Kenny Phan
Kenny Phan is a Managing Partner at FinancialFocus Retirement Plan Services, a 3(16) fiduciary. He works as a pension specialist who partners with financial professionals to design and implement pension plans. His area of expertise is customized defined benefit, defined contribution, and 401(k) plans. Serving financial advisors and businesses in the greater Phoenix area, he is supported by FinancialFocus Retirement Plan Services. Together, they provide comprehensive plan design consultation, administration, document installation, compliance testing, as well as IRS and DOL reporting for qualified retirement plans.