[IMGCAP(1)]In 2014 many of the country’s high-income earners will keep less than they pay in taxes.
With the top federal income tax bracket now paying 39.6 percent in taxes, before adding state taxes, payroll taxes and the loss of value of deductions, many high-income earners have found themselves in a tax-disadvantage.
As a result of the fact that earning more means you’re paying more, many high-income earners are now more than ever searching for ways to shield their income. In 2014, financial planners are looking for new avenues for tax deductions, which may in turn boost retirement contributions.
Currently, the two most popular and prevalent retirement plan options are 401(k)s and profit-sharing plans. However, the 2014 contribution limit for a 401(k) is capped at $17,500 per year, or up to $23,000 per year with catch-up contributions. Profit-sharing plans can help by increasing that limit by $34,500 per year. Even with both a 401(k) and profit-sharing plan in place, contributions to an individual’s retirement plan can never exceed $52,000 for those under 50, or $57,500 for individuals who qualify for the catch-up.
For many high-income clients, over a 10-year period, $500,000 of tax deductable savings hardly sets them up for the financial future they’re dreaming of. To deal with this problem, many high net worth individuals are turning to defined benefit pension plans, especially cash balance plans.
Cash balance plans are rapidly gaining popularity within the retirement industry due to plan flexibility and accelerated tax deferred savings. When cash balance plans are combined with 401(k) and profit-sharing plans, participants have the ability to contribute $50,000 to over $260,000 per year to their retirement plans, depending on age and other plan design factors. This is 100 percent tax deductible.
A cash balance plan is just a traditional defined benefit pension plan that provides retirement benefits for a participant based on a hypothetical account balance for each individual, making the plan look and feel more like a profit-sharing or 401(k) plan to the participant.
An employer works with a plan actuary to designate contribution amounts for each individual or segment of employees, depending on the plan’s objectives, and the employer is responsible for investing plan assets. Typically, partners will design a plan to take maximum tax deductions, while fulfilling discrimination testing.
The beauty of the cash balance plan is that once you leave the firm, you can take your vested balance with you. Many clients roll their balance into an IRA or a new 401(k). Where the $50,000 a year cap left them with $500,000 of contributions over 10 years, a cash balance plan gives them the opportunity to save $500,000 to $2,600,000+ over a 10-year period, tax deductible.
Kevin Luchetta, CFP, AEP, of Pioneer Financial, focuses on helping his clients create a complete financial plan. He can be reached at (646) 366-6740, firstname.lastname@example.org or www.pioneerfinancial-kl.com. Pioneer Financial is a marketing name for Kevin R. Luchetta & Jim DiNardo, who are registered representatives of Northwestern Mutual Investment Services, LLC.
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