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How the Self Employed can Get a BIG Tax DeductionSubmitted by HCO Private Wealth on July 7th, 2017
Reducing our client’s tax burden is a is a key objective for us at HCO Private Wealth which is why we are such big fans of a program that enables clients to shelter a significant amount of income from Federal and State income tax.
This program works similar to an IRA in that you can set aside income or savings and receive a full tax deduction for all amounts contributed to the program. The program works as an add-on to your existing solo 401(k) plan and is fully compliant with existing IRS rules and regulations.
The program has several advantages:
The ability to shelter up to six figures of income from taxes.
No income thresholds, phase outs, AMT issues, or other tax challenges.
You can choose to fund your annual contribution with income or with savings from another account.
The program utilizes a personal version of a corporate pension plan, called a "cash balance plan". The program is perfect for self-employed individuals who do not have full-time employees who are not family members.
Once you put the plan in place, the IRS requires that you sign up for a five year funding commitment. You will also need a specialized vendor to manage the regulatory and tax reporting to ensure you stay in compliance with all applicable laws.
You can use any brokerage account to hold your contributions, but you must be careful in your investment approach. The plans are typically designed with a requirement that you earn 5% per year --on average - over five to seven years. If you overshoot the return then future contributions may be limited. If you underperform, then you may be required to make up the difference via additional contributions to your account.
Make sure to work with an advisor experienced in these plans and obtain a personalized illustration that is customized to your tax situation. Make sure you also understand all of the rules and requirements of the program before signing up as the big tax shelter comes with some strict requirements.