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Archives for August 2017

Accelerate Your Financial Retirement With Cash Balance Plans

How it Works

Cash balance plans offer owner-employees in professional practices a vehicle to defer tax on income more than the annual contribution limits of traditional Sec. 401(k) and profit sharing plans. Professional practices currently account for the highest use of cash balance plans, with the highest concentration in the medical field. Cash balance plans are appealing to this demographic of doctors, dentists, lawyers, and accountants because these professionals often larger annual salaries and get a later start in accumulating personal retirement savings.

Benefits

One valuable method of tax deferral is contributing to a retirement plan. Federal tax limits on contributions to Sec. 401(k) and profit sharing plans limit benefits that can be realized from this tax-planning strategy. The maximum contribution into defined contribution plans is $54,000 in 2017.

Since cash balance plans are considered defined benefit plans contributions are not subject to this federal tax limit. The limitation on cash balance plans is on the annual payout the plan participant may receive at retirement. To optimize tax deferral and retirement savings, a cash balance plan can be used in conjunction with a Sec. 401(k) plan and a profit sharing plan.

Additional Benefits

Cash balance plans offer the added benefit of allowing the taxpayer to make significant retirement contributions over a compressed period.

Important Considerations

Owner-employees of professional practices can realize significant tax savings by using a cash balance plan but should undertake a comprehensive retirement and business analysis with a top-tier firm like Camuso CPA to determine whether it is appropriate for them.

Entities with established cash balance plans must pay into them every year, so cash balance plans are more suitable for established practices with a steady cash flow.

Although the annual pay-in does not have to equal the sum of the principal credits, the business must still meet the same minimum funding requirements as other defined benefit plans.

Cash benefit plans can also be costly to administer since businesses bear the costs of working with actuaries to determine pay-in amounts in addition to costs of general fund management.

When establishing a cash balance plan, it is also important to consider the effect of participation by non-owner employees during financial planning.

Consult with a trusted CPA before executing investment decisions or initiating any substantial changes to your retirement and investment plans. CPAs know your finances better than any other advisor and should have the expertise and network to offer valuable, preemptive recommendations. Investors and business owners of all types should look for an advisor that serves as a partner; an ideal CPA is a financial expert with companies within your industry that can provide ongoing financial and business advice when you need it most.

Camuso CPA PLLC’s focus and specialization delivers a unique perspective on best industry practices to provide the most value to clients. Contact us today for financial and tax planning and get your finances in order: https://www.camusocpa.com/contact/#/

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Common Questions Regarding Charitable Remainder Trusts

Do I have to take the income now?

You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates.

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized.

Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts.

 

Sounds great for me. But if I give away the asset, what about my children?

If you are concerned about replacing the value of the assets that you place into the charitable remainder trust for your children you can take the income tax savings, and part of the income you receive from the charitable remainder trust, and fund an irrevocable life insurance trust (ILIT) or what is referred to as a Wealth Replacement Trust. The trustee of the insurance trust could then purchase enough life insurance to replace the full value of the asset, or more, for your children or other beneficiaries from the income generated.

 

What are my income choices?

You can receive a fixed percentage of the trust assets which is referred to as a unitrust. The amount of your annual income will fluctuate depending on investment performance and the annual value of the trust.

The trust will be re-valued at the beginning of each year to determine the dollar amount of income you will receive. If the trust is well managed, it can grow quickly because the trust assets grow tax-free. The amount of your income could increase assuming the value of the trust grows.

Sometimes the assets contributed to the trust, like real estate or stock in a closely-held corporation, are not readily marketable, so income is difficult to pay. In that case, the trust can be designed to pay the lesser of the fixed percentage of the trust’s assets or the actual income earned by the trust. A provision is usually included so that if the trust has an off year, it can make up any loss of income in a better year.

You can elect instead to receive a fixed income, in which case the trust would be called a charitable remainder annuity trust. This means that, regardless of the trust’s performance, your income will not change.

 

Who can receive income from the trust?

Trust income, which is generally taxable in the year it is received, can be paid to you for your lifetime. If you are married, it can be paid for as long as either of you lives.

 

The income can also be paid to your children for their lifetimes or to any other person or entity you wish, providing the trust meets certain requirements. In addition, there are gift and estate tax considerations if someone other than you receives it. Instead of lasting for someone’s lifetime, the trust can also exist for a set number of years (up to 20).

 

Do I have to take the income now?

No. You can set up the trust and take the income tax deduction now, but postpone taking the income until later. By then, with good management, the trust assets could have appreciated considerably in value, potentially resulting in more income for you

 

How is the income tax deduction determined?

The deduction is based on the amount of income received, the type and value of the asset, the ages of the people receiving the income, and the Section 7520 rate, which fluctuates. (Our example is based on a 3.0% Section 7520 rate.) Generally, the higher the payout rate, the lower the deduction.

 

It is usually limited to 30% of adjusted gross income, but can vary from 20% to 50%, depending on how the IRS defines the charity and the type of asset. If you can’t use the full deduction the first year, you can carry it forward for up to five additional years. Depending on your tax bracket, type of asset and type of charity, the charitable deduction could possibly reduce your income taxes by 10%, 20%, 30% or in some cases even more.

 

What kinds of assets are suitable?

The best assets are those that have greatly appreciated in value since you purchased them, specifically publicly traded securities, real estate and stock in some closely-held corporations. (S-corp stock does not qualify. Mortgaged real estate usually won’t qualify, either, but you might consider paying off the loan.) Cash can also be used.

 

Who should be the trustee?

You can be your own trustee. But you must be sure the trust is administered properly—otherwise, you could lose the tax advantages and/or be penalized. Most people who name themselves as trustee have the paperwork handled by a qualified third party administrator.

 

However, because of the experience required with investments, accounting and government reporting, some people select a corporate trustee (a bank or trust company that specializes in managing trust assets) as trustee. Some charities are also willing to be trustees.

 

Before naming a trustee, it’s a good idea to interview several and consider their investment performance, services and experience with these trusts. Remember, you are depending on the trustee to manage your trust properly and to provide you with income.

 

For more information on charitable remainder trusts, or questions about getting CPA tax help in Charlotte, give us a call today.

 

 

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