The Impact of the Tax Cuts & Jobs Act (TCJA) 2018-07-04T07:24:59+00:00

Tax Cuts & Jobs Act
Why Qualified Retirement Plans Make More Sense Than Ever

Impacts of the new Tax Cuts and Jobs Act (TCJA)

The new Tax Cuts and Jobs Act (TCJA), significantly impacts many traditional tax and retirement planning strategies. While the TCJA was initially focused on simplification, the result is much more complicated for high income self-employed and small business owners. The bill focuses on driving down corporate and business taxes and creates a new tax planning tool: a significant 20 percent deduction (199A)  for tax-payers with pass-through income.

How Defined Benefit and Cash Balance plans can help

However, the rules around the deduction limit who qualifies and will require advanced planning by advisors and CPAs on behalf of their clients.  Interestingly, the value of high-contribution retirement plans such as Defined Benefit and Cash Balance  plans in providing large, above the line deductions definitively increases, due to the elimination of many common pre-TCJA deductions. When most people think about these plans, they typically think they are only suited for large corporations or government pension plans. However, what they might not know is Defined Benefit and Cash Balance plans are really smart options for small business owners who qualify.  

With the loss or limitation of common deductions like alimony payments, tax preparation fees and home equity loan interest have, mortgage interest and State and Local Tax deduction (SALT) your tax bill could go up without advanced planning by you and your Financial Advisor or CPA.  This is why qualified retirement plans that offer large contributions make more sense than ever.

The value of high-contribution retirement plans

Interestingly, the value of high-contribution retirement plans, such as SEPs, Defined Benefit and Cash Balance plans, in providing large, above the line deductions now increases, due to the elimination of many common pre-TCJA deductions. However, when most people think about these plans, they typically think they are only suited for large corporations or government pension plans. What they might not know is Defined Benefit and Cash Balance plans are really smart options for small business owners.  This is why these plans are now gaining in popularity.

In fact, Defined Benefit and Cash Balance plans, which have been around for decades, could now be a more important part of your tax planning strategy for 3 specific reasons:

 

  • Defined Benefit and Cash Balance plans can help you lower your tax bracket, boosting your overall tax savings.

  • These plans are a tool to get your QBI below the 199A threshold (mentioned above), unlocking an additional 20% deduction.

  • Defined Benefit and Cash Balance plans offer high retirement savings contribution limits (typically higher than a SEP or IRA), allowing you to turbo charge your retirement savings.

     

In addition, these plans help improve your financial security and protect assets from creditors.

To make things more concrete, here’s an illustration of how a Defined Benefit plan helps a small business owner save on taxes, turbo charge retirement savings and take advantage of the new 20% deduction available through the Tax Cuts & Jobs Act…

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