How Wealth Managers Can Use Pensions to Reduce Taxes
Wealth managers, law partners and doctors can turn to defined-benefit plans to get around the income limits imposed on owners of pass-through entities, Bloomberg writes.
Many high-earning financial professionals are already at a disadvantage as a result of the income caps placed on the new deductions for pass-through businesses introduced in the new tax law. But wealth managers can legally lower that taxable income through pensions. To get under the $315,000 limit for married couples, or under the $157,500 limit for single taxpayers, high-earning professionals can make contributions from their incomes to a defined-benefit pension set up by their company, including a new version called a cash balance plan, according to the news service. While workers in their 30s to early 40s can contribute less than $100,000 to such plans annually, those in their late 50s can contribute over $200,000 and workers in their late 60s can put in more than $300,000, Bloomberg writes.
This means high earners making more than the limit for pass-through entities can get down to an effective tax rate of 20%, Daniel Kravitz, president of retirement plan administrator Kravitz Inc., tells the news service. And after several years of contributing to a cash balance plan administered by the employer, the plan participant can usually roll the balance into an individual retirement account where they can be more aggressive with their investments, Bloomberg writes
The majority of such plans are used by businesses with fewer than 10 employees, in part because non-discrimination rules governing such plans require a profit-sharing retirement contribution by the business owners for their middle-class employees, Bloomberg writes.
As a result, cash balance plans can end up being too expensive for larger companies with a large number of low earners, according to the news service. But for small professional practices, the owners, rather than employees, can derive most of the benefits, Bloomberg writes. Business owners do need to be mindful of the costs administering a defined-benefit plan, however, according to the news service.