In each of the following scenarios, a life insurance component can be added to the plan designs to provide additional family security.
The addition of the extra benefit of life insurance protection not only provides an income tax free self-completion feature to the plan in case of a premature death, it results in a larger deductible contribution to help fund the extra benefits. Assuming no premature death, the retirement plan insurance can eventually be transferred out of the retirement plan and used to generate tax free cash flow for the participant during retirement and/or tax free benefits to the heirs.
We have a 51 year old independent consultant who lives in California who consistently earns more than $500,000 annually. He feels he pays more than his fair share of taxes and would like to both save for retirement as well as reduce his current income tax burden. In order to best attain his goal, he could establish and fund a Defined Benefit Pension Plan (DB) and a 401(k)/Profit Sharing Plan. This would allow him to set aside $215,308 annually towards retirement to the two plans. Assuming a current marginal income tax bracket of 49% (Federal plus State), his estimated tax deferral would be approximately $105,500 annually. Assuming he funds both plans to an assumed normal retirement age of 62, it is estimated he will have accumulated approximately $3.228 million at age 62 (assumes 6% earnings assumption).
Owner + Spouse Business
We have a professional athlete living in Texas who earns extra income from endorsements. She would like to maximize her contributions and her tax deductions. She would be able to attain both of these by opening a maximum funded DB plan and an EZ-k plan. By adopting both of these two plans, her total deductible contribution could be $229,995 and her estimated tax deferral @ 40% (Federal tax only; no state income tax) would be $91,998 annually.
Larger Company with Employees and Existing 401(k) Plan
There is an LLC operating with 13 employees that currently sponsors a 401(k) plan. The two owners would like to increase their retirement savings but do not necessarily want to increase the funding contributions for their employees. By adopting a new Defined Benefit Plan in addition to the current 401(k) plan and testing the two plans together (i.e., cross-tested plans), it can be demonstrated that the two plans, working in tandem, provide non-discriminatory benefits to Owners and employees alike. This combination of plans provides the two owners with 91.7% of the total first year projected contribution of $680,669. The estimated tax deferral at a marginal income tax rate of @47% (Federal plus State tax) would be $319,914 annually.
Combo Plan Sale
A family owned and operated “C” Corp operating in New Jersey has 7 total employees, 5 of whom are family members. The family members would like to save more towards their retirement while reducing their personal current income tax burdens. To best accomplish this goal, the family could set up both a Defined Benefit Pension Plan and a stand-alone 401(k)/Profit Sharing Plan. Funding these two plans could allow the family to contribute and deduct up to $457,348 annually. At an assumed marginal income tax rate of 49% (Federal plus State), they could enjoy a tax deferral of $224,101 annually while saving substantially for retirement. The five family members would receive allocations of 97.8% of the overall contributions to the plans.