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Tax Planning, Wealth Management

5 Secrets About Pension Plans & Income Tax Benefits

5 Secrets About Pension Plans & Income Tax Benefits

Not all wealth management tools are created equal. Further, some asset protection tools work better than others as well. Despite the fact that 10,000 people are turning age 65 every day in the United States, the majority of these individuals do not know the many benefits of pension plans as a means of wealth management.

Pension plans can be a huge tax benefit for many individuals, but they are often overlooked because they may seem “too obvious.” However, qualified plans are sometimes considered the “ultimate asset protection tool” while they also provide significant tax benefits.

Qualified plans are often overlooked simply because people do not know about them. These plans are never discussed in school, even in higher education programs. In fact, even CPAs and those you would think should be aware of this tool do not have much experience with this type of wealth management tool.

What is a Qualified Pension Plan?

A Fully Insured Defined Benefit Pension Plan acts as a way to save for retirement, a means to decrease taxes, and provides asset protection, all with one tool.

A pension is a trust, with its own tax identification number, so it acts just as other trusts would. It has a trustee, which is usually the pension owner. The user then puts assets into the trust, but the difference between this type of trust and other trusts is that assets placed into the pension are tax-deductible for federal income tax purposes.

This trust is often established by an individual’s corporation or LLC, but the pension sponsor is the individual, and the sponsor has complete control over the pension as the trustee. It provides virtually an impenetrable barrier for assets as against creditors or in bankruptcy.


1. Qualified Plans and Asset Protection

Your retirement plan gets special treatment under the law. Public policy dictates that individuals who have established retirement plans should be able to rely on those savings in the future. This is true, in part, because if creditors could reach these funds, the individual may have to depend on the state or federal government to support them in retirement. As such, saving on your own leads to the “reward” of asset protection in most circumstances.

2. Income Tax Benefits and Pension Plans

Many people use pension plans more for tax deductions than the asset protection benefits. This is because both the company that creates the pension and the individual can receive a tax deduction for assets placed in the plan. These advantages are therefore helpful for those who own their own business and establish a personal pension. They also grow tax-deferred. When a company places money in the pension, it is exempt from:

  • Medicare Taxes
  • Obamacare Taxes
  • State and Federal Income Tax
  • Social Security Tax

When you pull the money out of the pension, your taxes are often significantly less. As this particular tax deduction tool is woven into an IRA, you generally do not have to pay Medicare or Social Security taxes on the distributions.

Nonetheless, you will still have to pay federal income taxes when you receive the distributions. Regardless, your income tax rate is often lower in retirement than it was while you were working, which means that you pay less overall in federal income taxes by using this particular plan.

Obamacare taxes only “kick in” when you have over $250,000 in income per year, so in many circumstances, you may not have to pay taxes for that portion either.


3. Limits on Qualified Plans

There are specific limits on defined contributions plans, including 401(a) plans, of $54,000 for 2017. You can only contribute $18,000 to 401(k) plans as well. However, the limits on qualified plans are much higher, which means you can gain a significantly greater tax deduction as well. In fact, in some circumstances, you can contribute $350,000 or more and still receive a tax deduction.

The limits for qualified plans are based on your age, income, and how many years you have worked for the business. The limitation is “actuarially determined,” which means that the maximum amounts you can contribute are higher as you get older and if you have a higher compensation or salary history.

4. Qualified Plans Deal with Liquidity Problems

Many people assume that they can retire on their business income, but this is not a safe retirement plan. Companies can go under with a sharp turn of the market or due to advancements in technology. Others also assume that their business or even personal assets will allow them to retire comfortably. However, owning a great deal of land or equipment will not put food on the table in your retirement unless it is generating income. Having a qualified plan can help you rely less on your business and prevent problems associated with liquidity.

5. Qualified Plans and Extra Benefits

Unlike a 401(k) or similar plan that depends on the stock market, your qualified plan will already have a set amount of benefits at the outset. You can choose to take benefits as a lump sum or in periodic payments, or both, but you will already know how much that amount will be based on the amount that you put in. Even if the stock market crashes, your pension will not be affected. They are in guaranteed investment contracts with insurance companies, not the stock market.

Many insurance companies will also pair with those that offered qualified plans so that you can obtain certain insurance benefits with little to no additional charges. Most programs will provide disability benefits, for example, at no extra cost to you. Death benefits may also be available to your loved ones.


The Little Known Secrets of Pension Plans

Very few professionals can set up this type of pension plan for you and not everyone qualifies, which is why it is one of the best-kept secrets in the wealth management world. However, with access to Protect Wealth Academy’s resources, you can learn more about this asset protection tool, including how to create one yourself.  Sign up for a free membership.

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