Use your Company 401(k) Plan as an Effective Tax Shelter and Wealth Accumulator

Mark is a successful 52 year-old REALTOR® with a significant portfolio of commercial and shore rental properties. Mark is supported in his business by his wife, Stacy, who runs the office and coordinates all of the administration, and his brother, Tom, who is also a licensed agent. Mark has 2 other administrative employees and annual revenues exceeding $4 Million. Like many others in his industry, Mark’s business struggled in 2008 and 2009. During 2010, Mark began to see improvement. Based on early indicators, 2011 income will be strong and might exceed pre-recession highs. Yet, Mark will pay less in personal income taxes than ever before. Impossible?  No.  Here’s his story…

The problem?  Your Success! 

Mark hated, dreaded, and stressed over the annual exercise of trying to plan for his annual tax bill. The more successful his year, the more he worried about accumulating enough money to pay the tax man in April. During their usual get together, Mark’s accountant told him, "You had a good year in 2010, and your rental income looks like it is recovering nicely. We should be celebrating, but this is NOT good news in terms of your tax bill. I was not prepared for the amount of revenue you generated this year. With your strong 2011 projections, we need to plan NOW to shelter more income and avoid a huge 2011 tax bill."

Mark thought about that sobering news for a minute, "Can't I just put more in my retirement plan this year?  What’s the maximum??" asked Mark.

"Good idea" said the CPA, "The maximum we can shelter for you is $54,500, including your maximum 401(k) deferral and catch-up. BUT, I’m not sure what contributions would be required for your other employees in order for us to sock more away for you in the company plan...There are lots of non-discrimination rules that make it expensive, since most plans force you to treat your employees the same way you are treating yourself."

Mark thought, “Well, that doesn’t sit well with me. I treat my employees generously already; we do a company match. So it looks like my choices are pay a huge tax bill to the IRS or pay more than that in total because of what I have to spend on my employees in order to shelter the maximum for myself. That makes no sense!  I work too hard for every dollar.”

The Solution? Get specialized help and protect what you earned, with no risk.

Mark’s solution was to seek specialized help! Mark learned that his problem was his “cookie cutter” retirement plan. He found out that by investing in a customized plan document, along with annual consulting to determine the best possible solution for each year’s circumstances, he could create much more flexibility. 

For example, Mark was asked some basic questions about his business including his "wish list" for how much money he would like to shelter for himself, what he would be willing to spend on others in the company to achieve that goal, and whether there were any individual staff members he would like to single out and reward more generously within the plan, but without having to repeat that pattern in any other year. Mark was stunned to learn that these questions could all be incorporated into his company plan if he made the choice to leave the “plain vanilla” world. 

Mark’s Results

Mark decided to take the plunge and engaged outside experts to create his customized plan and work with him on an annual basis, starting with the best solution for 2011. Turns out it was not too late for Mark to shelter the full $54,500 for only 2% more per person than he was already spending on his current matching contribution. In addition, Mark made a decision to reward his brother Tom, as his longest and hardest working sales person, with an additional plan contribution. The most exciting news was Mark shaved $20,000 from his personal tax bill! His savings in the first year alone more than covered the cost of changing providers and making a one time investment in a customized plan document.

Mark thought later, “If I do this every year, I will have over $1.4 million in my own plan account within 10 years.  Plus, under federal law, no creditor can touch that money; it’s safe in a legal trust. I am satisfying all rules and regulations and can sleep peacefully.” 

For additional information on customized 401(k) plans, contact Lori Gordon.

Lori B. Gordon
Principal and CEO
the MandMarblestone Group llc
The Cira Centre, 2929 Arch Street, Suite 600
Philadelphia, PA 19104-2889
Tel:  215.222.5000