412(i) Defined Benefit Pension Plan Part III
Today we are going to look at the plan I was talking about yesterday in more detail. If you remember we had Joe Businessowner who had a law firm bringing in $800,000.00 a year with a tax bill of $320,000.00 and he also had two employees.
This next part is going to be a little bit math heavy, but I will try and make it as painless as possible. Now before I start, all of you CPA's out there this is using simple numbers without all of the deductions that Joe can take on his taxes. It would be proratta with the deductions BTW.
Joe Businessowner's income for his firm is $800,000.00
Joe Businessowner's tax bill $320,000.00
If Joe set up a 412(i) plan with an annual contribution of $300,000.00 he would take that $300,000.00 and use it to change his adjusted gross income. That would make it look like the business brought in $500,000.00 not $800.000.00. How I came up with Joe's tax bill was by taking the 800k of income and multiplying that by 40%. Now if I do that with his new adjusted gross income it shows a tax bill of only $200,000.00. He would then take the money he saved in taxes and put it towards his annual contribution to his 412i plan. Joe would only need to come up with 180k to fund his 300k annual contribution.
Now out of the 300k contribution that he made, he would see about 80% of that into his own retirement, whereas the other 20% would go into his employees retirement plans. This also does wonders for his benefit package to his employees. This could also eliminate his 401k contribution that he was making for his employees.
I know that this segment might have been a little confusing so If you have any questions just post a comment and I will try and answer them.
Dustin Weaver ACS PCS AAPA
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