Business owners have had their CPAs and attorneys on speed dial this year trying to figure out the full impact and consequences of last year’s tax changes on their 2018 Income taxes. While clearly some businesses will benefit, realizing lower taxes from pass-through businesses with less than $415,000 of family income— those with higher earnings will not be cashing in. They will see a bigger tax bill for 2018. Blame it on SALT, the $10,000 limitation on State and Local Taxes, as well as the elimination of certain key tax deductions. Not only are these business owners going to be hit with higher taxes, they are realizing that they are also behind on their necessary retirement savings. Their secret weapon to fight those higher taxes could be Defined Benefit Pension Plans.

Bob Keebler CPA, of Leimberg Information Services recently predicted that the new tax law would make 2018 a banner year for the highest number of Defined Benefit Plans installed in many years. The reasons he points to are because many pass-through business owners will try to manage their business income, hoping for eligibility for the 20% Qualified Business Income (QBI) deduction that was added to the tax law with Section 199A. Mr. Keebler felt that some of these business owners that were receiving a 20% tax reduction, would also use some of that money to fund their underfunded retirement plan. It is important to note that the Treasury is scheduled to issue guidelines and clarification soon for many of the provisions of Section 199A.

A recent article in the Journal of Financial Service Professionals addressed Defined Benefit Plans as a valuable tax saving opportunity after the new tax act. Co-authored by Ernest Guerriero CLU CFPA and Jamie Hopkins CFP CLU, the article thoroughly reviewed the reasons why Defined Benefit Plans work so well for successful small business owners. They specifically looked at the aforementioned 20% tax reductions for pass-through business owners. The co-authors provided examples of how implementing these plans would result in tax savings, and specifically discussed the additional tax deductions available when including life insurance in the plan as one of the asset classes. Guerriero and Hopkins conclude that a Split Funded Defined Benefit Plan will allow small business owners to contribute significantly more than a defined contribution plan and provides a much larger tax deduction. They added that not only would the contributions reduce taxes, but that the growth inside of the plan will be on a tax-deferred basis for both federal and state taxes.

Here are the top 3 reasons why a Small Business Owner will start a Defined Benefit Plan in 2018:

  • Client is using some of their tax savings to catch up an underfunded retirement plan
  • Client is using a pension plan to maximize the amount that they will receive under Section 199A
    Client needs to supercharge their retirement savings and wants to significantly reduce their 2018 taxes

Those are the key reasons why Defined Benefit Plans, and specifically Split Funded Cash Balance Plans are causing a flurry of interest for the 2018 tax year. It will undoubtedly keep CPAs and Advisors busy addressing their business clients’ concerns and desire to put these tax saving strategies in place before the end of the year.

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We are pioneers in retirement planning, featuring tax-advantaged defined benefit pension plans as exit strategies for high net worth clients. We partner with top industry Advisers to bring their clients preferred solutions to achieve large income tax deductions.


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