QBI May Be Better Than Salary Deferral
QBI may be better than Salary Deferral. Let’s talk:
I recently attended a webinar which provided some nifty tax ideas in 2019. Since the total tax overhaul has taken real effect, there’s a lot to learn, and I try to be a perpetual student of the markets and financial strategies…
Since a number of my clients and friends are business owners, this “QBI” topic is of great interest. It’s a deduction applied to Qualified Business Income… and it’s a hefty deduction at that. Without going too far into the weeds, it needs to be stated that the deduction only applies to certain income generated from your business (hence the title, “QUALIFIED Business Income”). However, I do believe it can apply to most small business owners. There’s a trick, however:
If you file around $160,700 as an individual or $321,400 as married, you begin to phase out of the deduction for QBI. BUMMER! Not to fret. There are some nifty financial strategies to accompany the nifty tax ideas.
Scenario 1: “I’m a lawyer who made less than the phase out limit. Am I better off taking the full QBI deduction or deferring wages into a qualified plan?”
Hello, Lawyer person. Believe it or not, you may be better off keeping your wages high to get the full QBI deduction. That doesn’t mean you should put off saving for retirement. Consider contributing the maximum $19,000 (plus $6,000 catch up if you’re over 50 – I just can’t tell… you look so young!) in a Roth 401k vehicle. Taxes are likely to only go up, so you could take advantage of the compounding tax free growth of a Roth while also realizing the full QBI deduction. It’s best for us to consult with your CPA before making a final decision.
Scenario 2: “I’m a doctor who made more than the phase out limit. Is there any way I can get some of that QBI goodness?”
Hello, Doctor person. There may be a solution where you defer enough wages to lower your overall income. We could look at implementing a 401k Plan with Profit Sharing so you can defer $56,000 (plus $6,000 catchup if you’re over 50 – I just can’t tell… you look so young!). THEN, we could work with an actuary to contribute to a Cash Balance Plan. The contributions to Cash Balance Plans are determined by the IRS based upon your age, but you can get upwards of $350,000 total deferred between all three vehicles. It’s best for us to consult with your CPA before making a final decision.
Thank you for humoring my imaginary conversations. That aside, the scenarios are similar to situations we encounter regularly. For the sake of brevity, I’ve condensed some complex strategies into two very short scenarios. In order to implement, we conduct a full inventory of the business’ desired sponsored benefits in order to provide an applicable strategy as well as enlist the services of a great tax advisor and actuary. It’s definitely worth exploring, however. It can mean MEGA tax savings!
Any opinions are those of the author and not necessarily those of RJA or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The above scenarios are hypothetical examples for illustration purpose only and does not represent an actual investment. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Like Traditional IRAs, contribution limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Earnings withdrawn prior to 59 1/2 would be subject to income taxes. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.