Solution for Taxing Times

Transcription

1 EMPLOYER Solution for Taxing Times Plan design strategies to help reduce your taxes and increase savings

2 Are taxes creating an uphill battle for your business and you? Today s professional practice owners face competing challenges for their income: taxes and retirement savings. With advanced plan design options, it s possible to reduce your tax burden, while saving significantly more for retirement than with a traditional 401(k). FOR EMPLOYER USE ONLY. NOT FOR USE WITH EMPLOYEES.

3 Is your income under siege? This chart underscores the cumulative effect that tax law changes have had on rising income levels since This chart reflects updated figures for 2018: INCOME LEVEL: includes taxes applicable to all income levels below, plus $500,000 single $600,000 Marginal tax rate of 37% 2.0% additional federal income tax on taxable income in excess of the threshold $425,800 single $479,000 Capital gains and qualified dividends rate of 20% Also subject to the 3.8% net investment income tax if modified adjusted gross income exceeds these levels $266,700 single $320,000 Itemized deduction phase out begins Personal exemption phase out begins Once the taxpayers adjusted gross income reaches $389,200 for single filers and $442,500 for married filers filing jointly, deductions and exemptions are gone. $200,000 single $250,000 Additional Medicare tax Net investment income tax 0.9% tax on earned income on amounts in excess of the $200,000/$250,000 threshold 3.8% tax imposed on investment income such as capital gains, rents, dividends and interest Source: irs.gov, The American Taxpayer Relief Act, Patient Protection and Affordable Care Act

4 The power of design A qualified retirement plan may be just what the doctor ordered. Implementing a qualified plan or altering the structure of your existing plan may help reduce your current taxable income. Dr. Pat Smith Age: 45 Tax Status: Married filing jointly, 1 child Self-Employment Income: $500,000 1 Single Employer, No Employees Earned income 3 THIS HYPOTHETICAL ILLUSTRATION COVERS TAX IMPACTS TO DR. SMITH S HOUSEHOLD INCOME 2 Without a qualifying plan contribution 2017 Taxable self-employment $500,000 $445,000 income 4 Social Security tax on Medicare tax on Additional Medicare tax on $15,922 (12.4% on first $128,400) $14,500 (2.9% rate) $2,250 (0.9% above $250,000) Federal income tax 5 $117,979 (37% marginal rate) Total federal taxes on BOTTOM LINE: $19,250 (16.3%) With a qualifying plan contribution ($55,000) $15,922 (same) $14,500 (same) (2.9% rate) $150,651 5 $131,401 5 in tax reductions by using the power of a tax-deferred qualified plan $2,250 1 (0.9% above $250,000) $98,729 5 (decrease of $19,250) (37% marginal rate) Reduction in current taxes on self-employment income by implementing a qualifying plan: $19,250 (16.3%) 1 Assumes one-income household, of $500,000 prior to any contributions to a qualifying tax-deferred retirement plan. 2 The hypothetical illustration is not intended to provide tax, accounting or legal advice. As with all matters of a tax and legal nature, clients should consult their tax or legal counsel for advice. The illustration is not intended to reflect the actual performance of any specific investment. Individual experience will likely vary. 3 Earned income is based on wages, salaries, tips, and other taxable employee and. 4 Does not include deduction for one-half of self-employment tax. 5 Based on standard deductions and exemptions including income-based phaseout rules. AMT does not apply.

5 Advanced plan design in action Traditional retirement plan structures like 401(k) plans cap savings opportunities at relatively low limits ($18,000 in 2017). More advanced designs, however, offer the same great tax deferred benefits of standard plan design with the much higher contribution limits to help you: Save more Reduce your current taxable income Increase your business tax deduction Attract and retain skilled talent Plan Type Integrated Integrated Integrated ADVANCED PLAN DESIGNS Benefit A defined contribution plan with an allocation formula based on a Social Security taxable wage which allows for larger contributions for highly compensated business owner(s)/ partner(s). A defined contribution plan that provides business owner(s)/partner(s) the flexibility to provide larger contributions to preferred groups of employees based on business classifications (typically owners and/or highly compensated individuals). A defined benefit plan can be designed to allow business owner(s)/partner(s) to weight plan benefit towards themselves 6, potentially realize significant business tax deductions and accelerate their accumulation potential. A Cash Balance defined benefit plan may allow a business owner to contribute significantly more than a traditional defined contribution plan. Participant HYPOTHETICAL PROFIT SHARING DESIGN SCENARIOS Age Eligible Compensation Integrated New Comparability Cash Balance/ Defined Benefit % of pay % of pay % of pay Owner 60 $270,000 $54, % $54, % $241, % EE 1 25 $30,000 $ % $1, % $4, % EE 2 55 $30,000 $ % $1, % $4, % EE 3 45 $30,000 $ % $1, % $4, % EE 4 35 $30,000 $ % $1, % $4, % Total $390,000 $74, $60,000 $257,760 % to Owner 72.4% 89.8% 95.2% 6 Based on the design, Cash Balance plans can allow the business to provide larger contributions to fund a hypothetical benefit for preferred groups of employees based on business classification. You should consider the implications to all participants before choosing an advanced plan structure.

6 To understand how a retirement plan or advanced plan design may work for your business, call your financial professional, local MassMutual retirement specialist, or our sales desk at This information is written in connection with the promotion or marketing of the matter(s) addressed in this material. It is not intended or written as specific legal or tax advice and may not be relied on for purposes of avoiding any federal tax penalties. Neither MassMutual nor any of its employees or representatives are authorized to give legal or tax advice. You must rely on the advice of your own independent tax counsel. Cash Balance plan designs are complex and require the assistance of legal and tax advisors and third party administrators. Additionally, Cash Balance plans, like defined benefit plans, generally require annual employer funding and they may not be suitable for some businesses. MassMutual s materials highlight Cash Balance plan advantages, but certain restrictions and limitations will apply based on plan design and retirement plan rules, among other factors, which may affect tax deductions, funding levels and distributions of plan benefits. For a more complete picture of Cash Balance plans, please contact your financial professional. Many tax planning strategies emphasize the deferral of current income taxes on the basis that your federal income tax rate may be lower at retirement. Please keep in mind that federal income tax rates are unpredictable and may be higher when you take a distribution than at the time of deferral. Other factors, including state tax rates and your income, may also affect your overall tax rate upon distribution. Please consult with your tax advisor for individual tax planning strategy and advice. MassMutual does not predict or in any way guarantee favorable tax results. NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION NOT FDIC OR NCUA INSURED NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT GUARANTEED BY ANY BANK OR CREDIT UNION 2018 Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA All rights reserved. RS C:RS