Ms Mehta is age 39 and works as an IT consultant. She is single and receives a 1099 as an independent contractor. She earns 200k of net income after business expenses and is taxed as a sole proprietorship. Her goal was to maximize her tax deductions and save as much as possible for retirement.
By setting up a 401k profit sharing plan combined with a defined benefit plan she was able to contribute a total of $104,703. ($74,703 for the defined benefit plan) + ($18,000 for the 401k) + ($12,000 for the profit sharing).
She could have contributed $54,000 into a Solo 401k, but this 401k/profit sharing/defined benefit combo plan allowed her to contribute $50,703 more.
Ms Mehta liked this solution because it satisfied several goals:
- She was able to aggressively save for retirement and made an annual contribution of $104,703 in 2016.
- She was able to get a $104,703 tax deduction. Based on a 28% marginal tax bracket this saved her $29,316 in federal taxes.
- Based on an annual contribution to the defined benefit plan of $74,703, the minimum guaranteed policy value for the annuity at retirement age 62 on November 1, 2039 is $2,497,071.
- In addition she will have the value of the 401k and profit sharing plan.
In 2016 $30,000 can be made into the 401k and profit sharing plan. Annual contribution limits can potentially increase with future IRS increases to the contribution limits. The value of the 401k and profit sharing plan at retirement would be determined based on market performance. These values are not guaranteed. The 401k and profit sharing would supplement the $2,497,071 guaranteed minimum in the annuity in the defined benefit plan at retirement at age 62.
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