The “Super SEP” One Person Split Funded Defined Benefit Plan
While defined benefit plans are most commonly implemented for small companies, they are effective retirement plans for solo owners with no employees who are seeking large income tax deduction. Typical examples are authors, entertainers, photographers, artists, consultants, real estate brokers, medical doctors who engage in clinical research or expert witness work outside of their medical practice, and individuals who receive board of director fees/income.
The client may be structured as an S-corp., a C-corp., an LLC, or may file as a Sole Proprietor on a Schedule C – as long as the client has “earned income”, a plan may be implemented. Depending up the individual’s age, income, and desire for deduction, contributions to a custom plan may be as much as five or six times the SEP limit.
Many of these individuals only maintain a defined contribution plan (e.g., a SEP or profit sharing/401(k)) which does not provide large income tax deduction availability. Clients may be unaware that much larger deduction is available through a defined benefit custom plan design.
Solution: (assume a 55 year old Consultant looking for maximum tax deduction):
The client’s financial advisor and PensionQuote presented a custom Plan as follows:
|Split Funded Defined Benefit Plan:||$240,000 (40% insurance/60% managed assets)|
|Profit Sharing plan:||$16,200|
|Total Tax Deductible Contribution:||$280,200|
- In a 45% tax bracket, the $280,200 represented a tax savings of $126,090 per year, more than five times the tax savings available in a SEP or a profit sharing/401(k) plan combination.
- The plan was uniquely designed to include a cash value life insurance policy as one of the investment assets. The life insurance provided:
- Larger on-going tax deductible contributions as compared to a plan invested only in managed assets
- Stability in the investment portfolio (guard against plan overfunding/underfunding issues)
- The opportunity for a future tax free income stream
- Self-completion (if the client died prematurely, his beneficiaries may receive income tax free proceeds)
- Enhanced asset protection