Doctors who earn self-employment income by working freelance are in a great position to save big on taxes in 2015 by establishing an IRS-approved qualified retirement plan called a small business defined benefit (DB) plan before December 31, 2015.
Doctors who do freelance work typically have high income and a correspondingly high tax rate on that income. A defined benefit pension plan (possibly with an Individual 401(k) tacked on) can enable such doctors to save tens of thousands of dollars in taxes each year while rapidly building a significant retirement nest egg inside a tax-deferred qualified retirement plan.
Do you fit this profile?
- Have high self-employment income or operate a small practice with up to five employees
- 40 years of age or older
- Willing and able to contribute at least $50,000 annually to a DB plan and continue this level of funding for 5 successive years
If you fit this profile, you may be able to make tax-deductible contributions to a DB plan in excess of $100,000 per year and thereby save $38,000 or more in tax annually.
Defined benefit plans offer by far the highest tax-deductible contribution potential (much higher than SEP-IRAs or 401(k)s) and therefore also the largest tax savings potential along with the most rapid nest egg growth. See chart below:
Defined benefit plans enable the self-employed to build a large retirement nest egg in a very short time. DB plan owners can accumulate as much as $1,000,000 to $2,000,000 in a plan in just 5-10 years. Once a defined benefit plan is funded to the IRS limit of $2.36 million, the plan assets can simply be rolled into a regular IRA.
The exact amount an individual can contribute to a DB plan depends on the personÂ’s:
- Age
- Income
- Years Until Retirement
Typically older individuals with higher income and fewer years until retirement will be able to make the largest tax-deferred contributions to a DB plan.
It is not just freelance doctors that stand to benefit, however. Here is a list of the typical professions of people who have defined benefit plans:
- Architects
- Attorneys
- Consultants
- Contractors
- Independent Corporate Directors
- Dentists
- Entrepreneurs
- Graphic Designers
- Independent Insurance Agents
- ManufacturerÂ’s Reps
- Mortgage Brokers
- Real Estate Agents
- Software Developers
DB plans enjoy several powerful features:
- Highest allowable contributions to a qualified retirement plan: $100,000+ (much higher than the contribution limits on SEP-IRAs and 401(k)s.
- Annual tax savings of $38,000 or more
- Investments grow tax-deferred, building wealth faster
- Tax-free rollover to an IRA at retirement (or plan termination)
- Flexible range of investment choices
Defined benefit plans are not appropriate for everyone, but for those in the right circumstances they can provide large tax savings and a very fast way to “catch-up” on amassing a substantial retirement nest egg.
Deadline to Establish a DB Plan for 2015 is Approaching
A defined benefit plan must be established before the end of the tax year for which contributions will be made. For most individuals and companies the date is December 31, 2015.
To learn how much you could potentially save in taxes, try our Tax Savings Analysis here. Or call us at 619-435-1701 or email us at: [email protected] and we would be happy to generate a complimentary proposal for you.
Read more defined benefit plans here.
To learn more about how we manage client portfolios, please visit us at www.orionportfolios.com
By Peter C. Thoms, CFA
