Dr Z is a physician age 37 who is married to Mrs. Z and they have a 4 year old son and 2 year old daughter. He makes 550k in 2017 and he is the owner of an S corporation and will pay himself $270,000 W-2 salary. Mrs. Z works about 25 hours a week as the business manager for the S corporation and is paid a W-2 salary of $50,000. They have no other W-2 employees.
This couple’s high income and relatively low monthly expenses allowed them to make the maximum annual contribution. Also, they wanted to purchase life insurance for Dr Z in the plan. Dr Z was the income provider for his family and they wanted to have the protection. They already owned $500,000 of term life insurance for each of them and they didn’t need additional coverage for Mrs. Z. After discussing the client’s life insurance needs they decided they wanted $3 million of whole life insurance on Dr Z. The actuary confirmed $3 million of life insurance was permitted, there are IRS limits to how much life insurance can be purchased in the plan based on income, age and annual contributions.
In 2017 they setup a combination 401k and profit sharing plan with a fully insured defined benefit plan for their S corporation. Dr Z and Mrs. Z were both eligible and to maximize their annual tax deductions and because they had a life insurance need the defined benefit plan was funded with an annuity and whole life insurance for Dr Z. The annuity and cash values in the life insurance are guaranteed by the insurance company.
In 2017 Dr Z paid himself a W-2 of 270k (the IRS maximum compensation used to calculate defined benefit contributions is 270k). The 2017 total contribution to the 401k/PS/DB plan is $111,154.
Here is the math - ($16,200 profit sharing plan) + ($18,000 401k) + $76,954 in the defined benefit plan combined between the annuity and $3,000,000 of whole life insurance for Dr Z.
The minimum guaranteed policy values for the annuity and guaranteed cash values for $3,000,000 of life insurance at retirement age 65 on 1/1/2041 is $2,695,772 for Dr Z.
In 2017 Mrs. Z was paid a W-2 salary of 50k. The 2017 total contribution to the 401k/PS/DB plan is $42,612.
Here is the math - ($3,000 profit sharing plan) + ($18,000 401k) + $21,612 in the defined benefit plan in the annuity. No life insurance.
The minimum guaranteed policy values for the annuity at retirement age 65 is $638,348 for Mrs. Z.
This plan satisfied several goals:
- They were able to aggressively save for their retirement since the combined 2017 annual contribution was $153,766.
- They were able to get a $153,766 tax deduction. Based on a 39.6% marginal tax bracket this saved them $60,891 in federal taxes.
- They were able to buy $3,000,000 of permanent whole life insurance for Dr Z. The life insurance provided protection for their family should Dr Z pass away prematurely. Should Dr Z continue to be healthy and live a long life then the permanent life insurance will be used for estate planning and to leave a legacy for their children or grandchildren.
- Based on an annual contribution of $76,954 for Dr Z and $21,612 for Mrs. Z they will have over $3.3 million at retirement. This total includes the guaranteed minimum value of both annuities and the guaranteed cash value of Dr Z’s life insurance.
- In addition they will have the value of the 401k and profit sharing plan. In 2017 $55,200 can be made into the 401k and profit sharing plan. Annual contributions 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 plan would supplement the guaranteed cash values in the defined benefit plan.
Here are case studies providing more examples.