The Biggest Self Employed Tax Deduction

In what may be the biggest tax deduction scheme around, some self-employed individuals are sheltering as much as $165,000 or more per year with tax deductible contributions to their retirement plans.  Such high levels of deductions can be legitimately achieved through the use of a defined benefit, or DB, retirement plan.

It's a well-known fact that putting money in a retirement plan is a great way to reduce taxes on current income while accumulating a nest egg for retirement.  With the creation of solo DB plans, it is now easier for business owners with no employees to sock away significant retirement dollars for themselves.

DB plans provide a specific monthly or annual benefit for their participants at retirement age.  This retirement benefit is based on a formula that is predetermined at the time the plan is established.  The amount of a participant's retirement benefit is usually based on a combination of his or her compensation and years with the employer. Yearly an actuary determines the amount the business must contribute for the participant in order to fund the promised retirement benefit.

DB plans are generally more complex and more expensive than other types of small business retirement plans.  But, the huge tax savings attainable with a DB can far outweigh these negatives.  That's because the annual contributions of the DB plan may exceed by three or four times the maximum limits allowed for other plans such as the 401(k), SEP-IRA, or Keogh.

Thus, the solo DB plan makes most sense for the older highly compensated entrepreneur, with no employees other than a spouse, whose business can stash $100,000 or more into a retirement plan for at last five years.

A few mutual fund companies have begun to offer turn-key solo DB or uni-DB plans that simplify and reduce the cost of setting up and maintaining these plans for firms whose only employees are owners and their spouses.  Ask your financial advisor or accountant about these plans.

About the Author - The Biggest Self-Employed Tax Deduction

Daniel Lamaute, of Lamaute Capital, Inc. specializes in setting up retirement plans for small business owners. http://www.InvestSafe.com