Interested in minimizing taxes while maximizing growth opportunities:
Situation:
Four partners—in a class action litigation firm— were maximizing contributions to a profit sharing / 401(k) plan totaling about $250,000 for the partners in retirement savings. Each partner earned between $1and $3 million annually. Two of the partners were interested in increasingthe amount they are able to put away for retirement while minimizing their risk of tax exposure.
With $1.1 million in Associate / Staff payroll, the firm was spending 6% on their employees in the profit sharing plan, equaling $66,000. [1,100,000 x .06 = $66,000]
Problem:
Two of the partners had become frustrated with their inability to make large tax deductible contributions to their current retirement plan. They are looking for a new retirement plan effective enough to convince the other two partners to move forward with the purposed new plan. Additionally, all four partners are looking for a strategy to attract new partners to the law firm.
Solutions:
A custom designed, Split Funded Defined Benefit Plan, was created for and presented to the partners as follows:
The partners increased their income tax deductible contribution from about $250,000 to $750,000 with a combination of their current 401(k) / profit sharing plan plus the addition of a Split Funded Defined Benefit Plan.
| Total 401(k) for Partners: | $99,000 |
| Total Profit Sharing for Partners: | $44,000 |
| Total Split Funded Defined Benefit Plan: | $607,000 |
| Total Partners Tax Deductible Contribution: | $750,000 |
| Employee Contribution only increased from 6% to 8.5%, an increase of about $27,500. | |
- In the 45% tax bracket, the $500,000 [750,000-250,000 = $500,000] of additional tax deductible contributions provided in this plan resulted in an additional $225,000 of tax savings [.45 x $500,000 = $225,000] for the owners. In other words, instead of writing a check to the IRS for $225,000 the owners will now pocket the $225,000 tax savings for themselves. Thus minimizing their tax exposure.
- The plan provided each partner with $2.8 million of life insurance, to be used for estate tax purposes.
- The partners were delighted to learn how they could use this plan as an effective recruiting and retention tool to attract new partners to the firm. This was accomplished by allowing for significant income tax deduction to any partner joining the firm.
- Each partner’s particular plan and contributions are fully portable upon leaving the firm or upon retirement. Allowing partners maximum flexibility / mobility throughout their career.
Disclosure: PensionQuote and its representatives do not provide tax, accounting or legal advice, and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise). Any tax statements contained herein were not intended or written to be used for the purpose of avoiding U.S. federal, state or local tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their own independent tax and legal advisors as to any accounting or legal statements herein before establishing a retirement plan and to understand the tax, ERISA and related consequences of any investments made under such plan.