Baby Boomers Look to Shelter Income

March 24, 2005 -- As baby boomers with their own businesses enter the last phase of what may very well be their peak earning years, they are becoming more concerned about how to cut their taxes and sock more away for their retirement.

One new tax planning tool is the Solo-Defined Benefit plan (Solo-DB). This plan allows you to put away as much as $170,000 or more per year for your retirement and you get a full tax deduction for your contributions.

A Solo-DB plan is a pension plan that guarantees a set level of income after retirement. Thanks to recent changes in the tax laws, this pension plan has become an excellent wealth accumulation and tax saving tool for owners of closely held corporations.

The Solo-DB plan is designed for the successful small business with stable income and that can make contributions for at least three to five years for up to five employees. The largest contributions go to the older and more highly compensated employees, which tend to be the business owners.

The tax savings from a Solo-DB plan can be substantial, indeed. For example, a 55 year-old sole owner earning $200,000 can contribute over $174,000 in tax-deductible contributions to his Solo-DB. Assuming a 40% combined federal and state tax bracket, this annual contribution could translate into tax savings of about $70,000 per year.

An annual contribution to the plan is required, but it is possible to vary this contribution to some extent. The contribution for each participant in the plan is determined by an actuarial formula that takes into account age, income, expected benefits, planned retirement date, and account balance.

Another handy feature of many Solo-DB plans is the participant loan feature. Each employee in the plan can take out a loan of up to $50,000. The loan can be used for any reason and is tax-free as long as it is paid back according to the terms of the plan.

The tax shelter potential of a Solo-DB plan dwarfs the maximum $46,000 (including the additional $4,000 for catch-up contributions) that self-employed individuals can stash away annually in a 401(k) or profit-sharing plan.

Note: The Solo-DB plans generally cost more to administer and are less flexible than other retirement plans for the self-employed such as the Self-Employed 401(k), or SEP-IRA.