How To Create Your Own Pension Plan
Classic retirement plans are an intriguing option for shielding small-business income from the IRS.
CNNMoney:
Like many successful business owners, Bob Johnson, founder and CEO of Johnson Insurance & Financial in McKinney, Texas, was hungry for juicy tax breaks. He found some – more than $200,000 in just 3 years – in an unlikely place: the old-fashioned defined-benefit pension plan.
‘It’s amazing how much you can save, and it gives you a great tax deduction,’ he says.
Johnson, 65, has been running a thriving financial services business for 35 years, generating net income of about $500,000 a year. He faithfully maxed out annual contributions to his SEP retirement plan, but three years ago he looked at his tax bill and wondered if there wasn’t a better way.
‘If you’re making $500,000 a year and contributing $40,000 to a SEP [the maximum in 2004], you still have $460,000 of net income on which you have to pay 35% tax,’ says Johnson.
It was another financial advisor who pointed him to a defined-benefit pension plan. These classic pensions have long been associated with large corporations – and in the age of 401(k)s they have become an increasingly rare perk. But recent regulatory changes have made them much friendlier for the small-business owner.
And here’s the kicker: High earners who are 45 and older are often able to sock away much larger sums than with defined-contribution plans such as IRAs, SEPs, or solo 401(k)s. Read on…
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Very interesting! It just goes to show even with all the innovations in the world of finance, some of the old financial strategies still work! Thanks for sharing!