Five Clients Who Need Your Help Before December 31st


Two questions that come up most frequently at the end of the year are ‘What’s the latest date a client can establish a retirement plan?’ and ‘Who should I reach out to before it’s too late?’ Let’s tackle these important issues one at a time:

The Deadlines: Plan Setup and Funding

To establish a qualified retirement plan (401(k), Profit Sharing, Defined Benefit, Cash Balance, etc.) for the calendar year, the plan document must be signed on or before December 31. The employer-provided contribution may be funded in the following calendar year by the due date of the plan sponsor’s tax filing deadline, including extensions. In fact, many businesses use the following year’s cash flow to fund their plan to take advantage of the deduction. At times, these businesses generate a strategic loss which, in certain business entities, then may be passed directly to company owners to reduce their personal tax liability.

401(k) and 403(b) salary deferrals must be reflected on the last payroll of the year, but may be deposited as soon as administratively possible after the first of the year. Typically, in those circumstances, a one-time bonus is issued and immediately deferred to maximize deferrals for the calendar year.

The Five Clients

Has No Plan: Whether this client is a one-person shop or has employees, a variety of qualified plan options, ranging from a 401(k) Plan to Profit Sharing to Defined Benefit/Cash Balance or any combination, will improve his or her tax situation by providing a deduction between $17,000 and $100,000+. The key variable to identify in this situation is the client’s surplus income which can be converted into pre-tax dollars and sheltered within a qualified plan.

Has a Plan, but Needs a Higher Deduction: This client is already funding a plan but needs to increase the deductible contribution by activating a Profit Sharing feature of their 401(k) Plan or adding a layer of a Defined Benefit/Cash Balance Plan. The key variable to seek in this situation is the contribution amount in addition to what is currently accomplished. As a rule of thumb, for a 401(k) Profit Sharing you would look for contributions of up to $50,000 per year; for a Defined Benefit/Cash Balance Plan, a good starting point is $70,000 per year or $20,000-$25,000 above the 401(k) Profit Sharing Plan funding level.

Has Surplus Income from Consulting: This client is an employee but also does some independent contracting work, serves as a member of a board of directors, receives royalty payments from books, or has a hobby which brings income which is not needed to support lifestyle. All of this income may be used to fund a retirement plan, such as a defined benefit plan, effectively reducing taxable income from that business entity to $0. The key variables to identify in this scenario are income levelreliability of cash flow, and a desired savings goal.

Sponsors a SEP or SIMPLE IRA: This client has an IRA-based retirement plan which was established because of administrative easy, low-cost, or, perhaps, because other options were not appropriate at the time or were not evaluated at all. The frequent downfall of these arrangements is two-fold: it either limits contribution potential (higher than necessary income tax) or comes with a high cost of benefits for employees of the business (inefficient distribution of benefits). In other words, a free plan may cost a client thousands of dollars in unnecessary taxes. Key variables to consider in this situation are contribution objectivecurrent contribution level, and, when applicable, total workforce.

Works as an Independent Contractor: By law, this client is not eligible to participate in the plan sponsored by companies where the contract work is done. As a result, often individuals in this role end up limiting their funding to an IRA or an IRA-based retirement plan, therefore foregoing opportunities to reduce their taxable income and save for retirement in a tax-efficient vehicle. Key variables to consider in this scenario aresurplus income, funding objectivesreliability of income stream and need for flexibility in funding.

Help to Secure a Deduction

There is still time to make a positive difference in your client and prospects’ tax exposure. The profiles identified above are some of the examples of the immediate year-end opportunities. Your First Allied Retirement Services subject matter experts are available to assist your clients in securing a deduction for the current tax year. We will help with discovery, qualifying opportunities, plan design and timely implementation. Give us a call today, (888) 926-0600 or send us an email to .