If you’re a one-person business or have substantial self-employment income outside of your “regular” job, a Solo Defined Benefit (“DB”) plan may be for you. We recently received a call from a professional with the situation of a surprise $250,000 income boost this year and another $100,000 the following year. His question was “how can I avoid or defer taxes on all this extra income?”.
While a Defined Contribution (“DC”) or 401(k) plan is a great option for many, the annual tax deduction limits of $52,000 for 2014 would not be sufficient for this situation. So, how can our professional set aside this extra $250K for retirement, get a tax deduction for that amount, get tax deferral on any investment earnings and have the assets shielded from any creditors? A Solo DB plan meets all of those criteria and can be custom designed for the individual circumstances to allow the individual to meet these goals and work with their current investment advisor.
The first step is determining your projected cash flows and desired contribution levels along with your timeframe. Once that is decided, your actuary will design a plan to achieve that goal and provide you with a forecast of future tax deductions and retirement benefits. So, if you’re lucky enough to have the income and looking for safe & legal ways to avoid/defer taxation, a Solo DB plan might be for you.