Income Tax Planning for Executives & Business Owners

Today, most people associate the
term “pension” with a defined
contribution plan of some sort: Profit Sharing plans, IRAs, SEP-IRAs.

The Benefit Focused Plan is comprehensive: it links income tax savings now with future retirement security and anticipates the problems of estate planning. With the single exception of income tax on monthly retirement benefits, all taxes including income tax, estate tax, generation-skipping tax, probate tax, state inheritance tax -- are bypassed. And each element of the Plan is based upon conservative earnings and tax compliant assumptions and practice.

Traditional pension plans are attractive for two reasons: they offer a first step to financial security in retirement, and they allow tax-deductible contributions. But there are two disadvantages:

1. Defined contribution plans discriminate against the business owner who tends to be older than most of his or her employees.

2. When compared to the business owner’s income, the defined contribution plan permits only small before-tax contributions. All this week we’re addressing this strategy in the succeeding releases.

The younger you are, the less it matters that your pension contributions are subject to severe restriction. Income for the young is usually relatively low, so they usually contribute as much as they can afford. And, with their contributions compounding over so many years, the young employee may be virtually certain of a retirement benefit that is a high percentage of his or her current income based on their extended timeline.¹ All this week we’re addressing this strategy in the succeeding releases. Charlie Day co contributed to this press release.

1 That benefits compound over many years for the relatively young non-highly compensated employees (NHCEs) becomes the basis for a type of Benefit Focused Plan that relies on cross testing. Such a plan design is able to meet requirements but still achieve lower over-all plan contribution requirements for the plan sponsor. A case study that explores a Benefit Focused cross-tested plan is available from Actuarial Business Solutions, LLC or your advisor.