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Can You Have A Second Retirement Plan?

Can You Have A Second Retirement Plan?

| February 17, 2020
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Have you ever wondered…. 

How can I pay less taxes???

How can I put away more money and get a tax deduction on it?

Well good news my friend!!! There might be some options for you!

First, there are a few long term strategies that you might want to check out.

Discover these prior blog posts…

What Is the Owner Only 401k?

The Ultimate Guide to Back Door Roth IRAs

What Is The Super Back Door Roth IRA?

Are you able to utilize all of these strategies and/or max them out?

Great!

Now let’s step up our game and take it up another notch to try and crush your taxes.

What if you had a SECOND retirement plan?

You may be wondering --- is that even legal?

Heck yes it is!

Check out what the IRS has to say in this article.

There are two basic types of retirement plans:

1). A defined contribution plan

2). A defined benefit plan

You can contribute to BOTH a defined contribution plan AND a defined benefit plan.

You’re probably most familiar with a defined contribution plan. Those are all those funny acronyms with numbers and letters--- 401(k), 403(b), SIMPLE, and SEP. With a defined contribution plan, it is typically the EMPLOYEE who determines what they are going to contribute with the employer doing some matching or profit sharing. The EMPLOYEE is in charge of the investments and making the right decisions. Also, the EMPLOYEE can usually walk away with the money in the account at any time.

In contrast, a defined benefit plan is one where the employer is in charge of everything and often involves an income stream like a pension that they are obligated to pay to the employee once they retire. In this case, the EMPLOYER determines what they are going to contribute (within limits that the government requires). The employer is in charge of the investments and so on.

Example of Two Defined Contribution Plans

The IRS says that you CANNOT contribute more than $19,000 to a defined contribution plan if you are under 50 years old to two different defined contributions plans like a 401(k) and a 403(b). 

It’s a total of $19,000 combined.

HOWEVER, that doesn’t stop you from also contributing to a 457 deferred compensation plan or potentially a 401(a) on top of the 401(k)/ 403(b). 

They specifically cite, “If you’re in a 457(b) plan, you have a separate limit that includes both employee and employer contributions.”

For example, a physician may be a W-2 employee at a non-profit hospital. The hospital may offer him the chance to enroll in a 403(b) where the physician can salary defer $19,000 and the hospital does some matching.

ON TOP OF the 403(b), the hospital may also offer the same physician the chance to enroll in another retirement plan called a 457 deferred compensation plan where they can ALSO deduct ANOTHER $19,000.

That’s a total of $38,000 the physician could sock away and get a tax deduction on it.

How You Could Get HUGE Tax Deductions- Defined Contribution Combined with Defined Benefit

Let’s take a look at another situation--- a small business owner has a 401(k). He and his wife pay themselves W2 wages from the company. He’s socking away $19,000 and has a match of another 6% from the company. She’s socking away another $19,000 and has a match of another 6% from the company.

However, they make some good dough and want to put away even more money to avoid the horrible six figure tax bill that they are receiving.

Let me tell you about a client from Colorado who had a lot of success in his professional field, but he was tired of the rat race…

He was burned out going through the grind, day after day after day. He was tired of working “for the man.” So, he decided to join up with a colleague to start a business.

I was really excited for him but, honestly, a bit nervous. I’ve seen several small businesses flounder for a few years before making decent profitability.

But man, they really hit it out of the park! I was shocked at their jaw-dropping level of success.

In year one, they had over $1,000,000 in revenue, netting them over $500,000!

They were incredibly nervous about the taxes. Most of the earnings would have thrown them into incredibly high federal and state tax brackets of somewhere between 40 and 50 percent (not even including FICA taxes on W-2 wages).

That is a hell of a tax bill!

We spent a lot of time looking at different options including the SEP IRA, the SIMPLE IRA, and the traditional 401(k), but none of them could offer the deduction they were seeking.

I checked with a few resources and was pleasantly surprised to find out that new businesses can be eligible for defined benefit plans. I had previously thought that business owners had to have a track record of a few years.

We were able to set up a combination defined benefit AND 401(k) plan. They were able to sock away over $200,000 of taxable income. 

This was a tax savings of over $80,000, the equivalent of buying a new Tesla!

And then, to top it all off, they could plan on doing it again the next year.

This bears repeating ---- Defined Benefit plans can allow you to save $60,000 or $80,000 or $100,000 or even $200,000 or $300,000 far, far, far beyond what you can normally do in a defined contribution plan.

The potential of the tax benefit is enormous!!!

How do they work? There are several basic levers that determine what you can sock away in a defined benefit plan.

1). Your age. The older you are, the more you can put away

2). Your business income. This could be W-2 wages if you get paid that way through your corporation or through your profits if you are a sole proprietor. The higher your income, the more you can put away.

3). The number of employees. The lower the number of full-time employees, the less money you have to give to others. DB plans are ideal for solo folks or husband-wife teams or people who employ contractors rather than employees.

4). Prior contributions you make to DB plans. Also, you can underfund or overfund a plan. In a year, you could put away a range of numbers. You aren’t locked into a certain number. For example, a third party administrator may calculate that you could put away a range from $80,000 to $120,000 with a ‘suggested’ contribution of $100,000. If you put away $120,000 to get a larger tax deduction, it may lower the range for the next year. Alternatively if you put away $80,000 because you don’t have as much cash, you may be forced to make a larger contribution in future years.

However, it’s not all rainbows and sunshine. There are a few things you should be aware of.

Cons of DB Plans:

1). They cost more to administer. Most third party administrators charge $1,500 to $3,000 a year to help make all the calculations and file the proper forms with the IRS.

2). You are making a minimum of a 3 year commitment. It cannot be a one and done.

 

Final Thoughts on Two Retirement Plans 

If you have the ability, combining two retirement plans can be a wonderful way to double, triple, or even quadruple your taxes deductions. 

If you are employed, you should consider looking into a ‘traditional’ defined contribution plan like a 401(k) COMBINED with a 457 DC.

If you are self-employed, you should consider a 401k combined with a defined benefit plan.

What do you think---- would you implement two retirement plans?

E-mail me at dave@daviddenniston.com and let me know.

Advisory services through Capital Advisory Group Advisory Services LLC and securities through United Planners Financial Services of America, a Limited Partnership. Member FINRA and SIPC. The Capital Advisory Group Advisory Services, LLC (CAG) and United Planners Financial Services are not affiliated.

The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation. Neither United Planners nor its financial professionals render legal or tax advice. Please consult with your accountant or tax advisor for specific guidance.

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