The Pension Secret the Rich are Using to Win with the Trump Tax Plan


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Today we’re fortunate to have Brett Goldstein, pension expert and President of The Pension Department, disclosing a strategy his business owner clients are using right now to save on taxes with the Trump Tax Plan.

In the mid to late 90s when you retired from your job, you got a watch, a retirement party and a monthly pension.  Today, only about 75 of the 500 largest companies in the United States, offer retirees a monthly pension. Although the number of pension plans have decreased significantly over the years, all that is about to change thanks to The Tax Cuts and Jobs Act (TCJA)

TCJA was signed into law by President Trump.  It allows owners of sole proprietorships, partnerships, trusts, and S corporations to deduct 20% of their Qualified Business Income (QBI). If you are a specified service business, the reduction will start to phase out for single filers at $157,500 of taxable income and be completely gone after $207,500. For married-filing jointly, the reduction begins to phase out at $315,000 and is fully gone at $415,000.

A specified service business includes any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.

This reduction is now being called the 199A reduction. If you are a high-income earner, in this specified service business category, how can you lower your income so that you qualify for the 20% reduction?

One way to bring your income down is by setting up a pension plan.  Most businesses today offer a 401k or similar plan.  However, a pension plan will allow those high-income earners in the specified service business, to significantly reduce income and possibly qualify for the 199A reduction. Businesses that are not in the specified service business, can also set up a pension plan.

For example, Dr. Bob is 55 years old and is not married. His medical practice is set up as an S Corporation. If Dr. Bob made $270,000 a year, his maximum $61,000 401(k) or SEP contribution wouldn’t be large enough for him to lower his income below $157,500.

However, if Dr. Bob set up a defined benefit plan, he could contribute approximately $200,000 to a pension plan in 2018 and get a large enough deduction to bring his income down and take the full advantage of the 20% 199A reduction.

One common misconception to 401ks and pension plans, is that you are only deferring the tax.  Ultimately when you withdraw the money at retirement, you have to pay income taxes.  This is a common misconception that most people have about retirement plans.

Certain distributions from a 401k or pension plan can be made without having to pay taxes.  When you hear tax free, you automatically think of a Roth account.  In a Roth account your contributions are not tax deductible, but withdrawals are tax free.

If your 401k or pension plan is set up correctly, not only are your contributions tax deductible, but your withdrawals are tax free as well.  If you have set up your plan correctly, then withdrawals for medical issues, both before retirement and after, can be done without having to pay taxes.

For example, before retirement age, withdrawals from a 401k or pension plan to pay for medical bills for certain injuries or illnesses can be made tax free.  After retirement, withdrawals can be made from only a pension plan to pay for medical bills, insurance premiums, nurses, assisted living facilities, and other long-term care needs.

Surprisingly you don’t have to incur the medical bill.  Withdrawals can be made tax free for medical reasons for spouses, children, and other dependents.

The older you are, the larger the defined benefit plan contribution.  If you are in your early 40’s and a high-income earner, the maximum contribution to a defined benefit plan is approximately $100,000. By the time you reach your mid 40’s, your maximum contribution to a defined benefit plan jumps to about $130,000. You can always combine plans and set up a 401k and a pension plan. Your 401k contribution is limited to $24,500 in 2018 if you are over 50.  Then you can contribute to a pension plan in addition to your 401k contribution.

Retirement plans have always been a valuable tax reduction strategy. Unfortunately, if you do have employees, they will need to receive similar contributions to the 401k and Pension Plan.  In addition, if your 401k or pension plan does not contain the proper language, you will not be able to make any withdrawals tax-free.

Under the Tax Cuts and Jobs Act (TCJA), it could be more expensive not to have a pension plan in place. As such, those high-income earners in the specified service business category should sit down with a pension expert who is familiar with pension plans and these tax-free withdrawal options.  Not all advisors will be familiar with pension plans and these tax-free options.  You need to make sure you are talking to advisors who are familiar with them and discuss the benefits of setting up a pension plan. Even if you don’t need to lower your income to help you qualify for the new 20% 199A reduction, a pension plan with a tax-free medical benefit can a great way to increase your deductions.

Are you ready to find out how these strategies can work for you? Contact Brett Goldstein directly at Brett@thepensiondepartment.com

Remember that pension plans need to be in place before year-end, so the clock is ticking!



2 Comments

  1. Diane Kennedy says:

    Thank you!

  2. Mir Shuttari says:

    Valuable and timely information.

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