Brian is a software design consultant age 54 and is the owner of an S corporation, he is the only employee. He is married to Tabitha age 49 and she works as a nurse and makes W-2 salary of 100k. From 2014 to 2016 Brian had been contributing to an Individual 401k he had set up at Fidelity and was contributing about 50k per year.
Brian felt he was a little behind saving for retirement and wanted to increase his annual retirement contributions. The solution was to set up a 401k and profit sharing with a fully insured defined benefit plan in 2017.
Brian anticipated he would have 230k of revenues after expenses in 2017. Brian, his CPA and the actuary worked together to determine what W-2 made sense. After looking at several scenarios they decided on a W-2 salary of $85,000, which would have left him with about 145k in in profits for the S corporation. Brian’s goal was to maximize his tax deductible contributions to a retirement plan so he could reduce the 145k in profits that would normally flow through to him as a K-1 distribution so he could pay less federal income taxes.
Based on a W-2 salary of 85k the 2017 total contribution was $145,160. $24,000 for the 401k + $5,100 for the profit sharing and $116,060 for the fully insured defined benefit plan
The $24,0000 contribution to a 401k is made using Brian’s W-2 salary and this is tax deductible on his personal tax return. The profit sharing $5,100 and defined benefit $116,060 are tax deductible as a business expense to the S corporation.
Brian liked this solution because it satisfied several goals:
- He was able to aggressively save for retirement and made an annual contribution of $145,160 in 2017.
- He was able to get a $145,160 tax deduction. Based on a 33% marginal tax bracket this saved him $47,902 in federal taxes.
- Based on an annual contribution to the defined benefit plan of $116,060 the minimum guaranteed lump sum value of the annuity at retirement age 62 on February 1st 2025 is $1,063,006.
- In addition at retirement he will have the value of the 401k and profit sharing plan. In 2017 $29,100 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 $1,063,006 guaranteed minimum lump sum in the defined benefit plan at retirement at age 62. Here are case studies providing more examples.