Attorney with high income due to a one time event

John is a self employed attorney age 60 who is taxed as a sole proprietorship with no W-2 employees. In 2016 he won a big case and made 600k in net income. In a normal year he makes about 150k. In previous years he funded an Individual 401k and had been contributing about 50k per year. He wanted to setup a plan that would allow him to get about a 200k tax deduction for 2016 and then amend the plan in 2017 to reflect 150k of compensation so he could contribute more in line with a normal contribution of about 50k per year like he had been making to the Individual 401k.

The solution was to setup a 401k and profit sharing plan combined with a fully insured defined benefit plan.

In 2016 we targeted a $200,000 contribution for him with pay of $600k. He had the option to contribute $170,620 to just the defined benefit plan or contribute up to $210,520 if he wanted to contribute the maximum into the 401k and profit sharing plan. The 401k and profit sharing contributions are discretionary each year.

In year 2017, we amended the plan to reflect a reduction in pay to $150k and decreased accruals going forward to target a $50,000 contribution for him. He was able to contribute $37,842 to the defined benefit plan and if he also wanted to contribute to a 401k and profit sharing plan the combined maximum would be $67,207. Each year the 401k and profit sharing contributions are discretionary.

This solution allowed John to get a huge tax deduction for his windfall income year in 2016 and by amending the plan he could fund future years to a level that was within his budget.

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Eric Kuniholm Eric Kuniholm, CPWA®
Certified Private Wealth Advisor®
Beacon Capital Management Advisors

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