How One Doctor and One Entrepreneur
Cut Taxes by up to $100,000
by Weldon J. Reeves, CPA

Income taxes are on the mind of most small business owners and self-employed professionals - and the question "How can I reduce this tax burden and plan for my personal retirement at the same time?" is always present. One of the most overlooked tax strategies is that of a formal pension and retirement plan because it's an area that requires specific expertise in small business (1 - 25 lives) retirement planning.

The two basic types of retirement plans are (1) defined contribution plans (i.e., IRAs, 401(k) plans, SEPs, SIMPLEs, and Profit-Sharing plans) and (2) defined benefit plans (i.e., "old fashioned" pension plans). Defined contribution plans have annual contributions limits that are clearly defined; hence the name, "defined contribution." Defined benefit plans are designed to fund for a "defined" retirement benefit and are often avoided as a tax planning strategy for the small businessman - this can be a very costly mistake!

Defined benefit plans, unlike the defined contribution plans, do not have clearly defined contribution limits. A relatively unknown type of defined benefit plan is the 412(i) Pension Plan that allows the entrepreneur to put away more tax deductible money than any other plan available. Examples:

A 38-year old dentist (with four employees) has a net income of $300,000 and is taxed at the highest tax rate, 39.6%. Traditional pensions plans limited both her annual contributions and the amount allocated to her personal account. Her new 412(i) plan now can maximize her contributions and minimize her taxes with remarkable results! Her initial contribution for her own benefit is $102,744 (tax savings of $40,687) and contributions for her employees is $38,320 (additional tax savings of $15,175). So, her total tax savings of $55,862 more than pay for the contributions that she has to make for her employees. In addition, the pension plan can have a vesting schedule, which means that the employees will have to stay for at least 6 years to be eligible to receive the entire benefit that has been funded.

At the other end of the spectrum is a 60-year old entrepreneur who needs to accumulate significant dollars very quickly. With an initial contribution of over $300,000 going into his personal account (tax savings of $117,000), in five short years his age 65-retirement goal can become a reality.

As a self-made professional and entrepreneur, selecting the "right" retirement plan for your situation requires the advice and council of an experienced retirement plans professional who specializes in the small business (1 to 25 lives) marketplace. Making the "wrong" choice can result in paying more taxes than necessary, paying excessive administrative expenses and falling short of retirement goals.

Weldon Reeves is a CPA specializing in tax and personal finances. He consults with major corporations on employee benefits issues. For more information on the services Weldon offers, check out his web site at www.reevescpa.com or email him at weldon@reevescpa.com.

The author is a CPA and a registered representative of Signal Securities, Inc. Securities placed through Signal Securities, Inc., 700 Throckmorton, Ft. Worth, TX 76102, (817) 877-4256. Member SIPC.

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