I would like the forum members recommendation whether I should proceed with setting up a solo personal Defined Benefit plan for my spouse’s 1099 income of 175,000$. His income is discretionary . My high income covers all our expenses. His age is 45. Likely to retire in 6-10 yrs
He currently has solo401k where he contributes ( 19K employee contribution + 27k 20% business profit ). we contribute the remainder of his income into taxable account
. We are considering the Schwab Defined benefit plan to allow greater tax deferred contributions than the current solo 401k. The schwab plan proposal which we received done with actuarial analysis indicate 1.4 million dollar benefit at a retirement age of 55, with average contribution of 74K$ per year. He still gets to contribute 19k for the employee portion of his solo 401k.
So 74K pretax in defined benefit plan vs current 27k employer/profit sharing contribution in solo 401k
Our intention is to run the plan for 6-8 years and then terminate plan upon retirement and roll assets into solo401k
The Schwab plan proposal has a interest crediting rate of 3.93%%. Our plan is to invest the contributions in a Total Bond Index fund which would fit into our asset allocation plan across our overall portfolio. This would also prevent overfunding or high volatility in the defined benefit plan.We use taxable accounts for our stock portion of our portfolio
Currently we are at the 35% marginal tax rate. Our hope is that when we withdraw money from the tax deferred accounts we will be in lower tax rate.
In retirement we anticipate a spending level of 140,000$ per year to be with drawn from a combination of taxable, tax deferred accounts which would place us in the 22-24% marginal tax rate.
In essence we are a creating a tax arbitrage of 10-13% on pretax contributions of 376,000
Would we be better off investing in taxable accounts vs the Schwab Defined Benefit plan/tax deferred ?
The schwab plan would cost around 20K over 8 yrsJune 7, 2019 at 2:07 am MST #219793Steven Podnos MD CFPParticipantStatus: Physician, Financial AdvisorPosts: 168Joined: 09/21/2017
I’d recommend using the cash balance plan. You will get an excess deductible contribution of about 400K over the eight years at a cost of 20K, so 95% of the contributions accrue to you. Not only do you get the probably arbitrage of lower tax rates in retirement, but you also get close to thirty years of tax deferral for your funds to appreciate. Throw in asset protection and it’s a nice package.
Are you DCing the solo 401k?
I don’t think you should have to. Is the solo 401k at Schwab?June 7, 2019 at 6:25 am MST #219823
Plan to continue solo 401k for employee portion of solo401k ( 19K$) only .
Schwab charges additional 750$ to calculate employer/profit sharing contribution if a solo401k has to work in concert with DB plan. Typically you are limited to 6% profit sharing contribution if there is a defined benefit plan. Our profit sharing contribution would then be very small and therefore not worth the 750$ fee.
The choice is:
Defined Benefit Plan (74K)+ Solo401k ( 19K employee Deferral ) vs Solo401k only ( 27K employer+19k employee)June 7, 2019 at 8:27 am MST #219871DAKParticipantStatus: Other ProfessionalPosts: 22Joined: 11/30/2016
Also consider total MFJ taxable income. I’m guessing combined that you might exceed threshold for the 199a QBI deduction, but really big DB deductions could move you into range for spouse to claim it. Of course, if spouse is not in a SSTB, then hitting that threshold is less important.June 7, 2019 at 11:49 am MST #219944
^^^ good point. Also child tax credit phaseout from AGI $400-$440k. Marginal tax rate through that range is increased 5% per child eligible for the $2k credit.June 7, 2019 at 11:59 am MST #219949
My spouse’s income would qualify for the 199a QBI deduction. But our combined MFJ AGI phases us out of that deduction. I am a high W-2 income earner, my income leads to this phaseout. My spouse income of 150K is 1099 income
As a W-2 income earner, I have limited tax deferred space. Hence the desire to increase our deferred space thru spouse’s 1099 income . Our marginal tax rate is at 35%
The Schwab defined benefit plan is essence a tax arbitrage from marginal tax rate of 35% to maybe 22% in retirement . The tradeoff is the loss of flexibility given the required contributions to DBP. Mathematically the correct answer is to go with the defined benefit plan
The choice is 74K pretax in defined benefit plan vs current 27k employer/profit sharing contribution in solo 401k for 8 yrs and then roll DBP into IRA or solo401k.
Spouse’s income is stable as far as we know but dependent on shift availablity as locum tenens provider in the community, so there is always a unknown.
Would forum members recommend proceeding with DBP ?June 7, 2019 at 4:05 pm MST #220002
How many kids 18 or under?
AGI anticipated if you do the DBP?June 7, 2019 at 4:49 pm MST #220006
How many kids 18 or under?
AGI anticipated if you do the DBP?Click to expand…
2 kids under age 18 ( 15 &9)
AGI after contribution to DPB would be 580KJune 7, 2019 at 8:08 pm MST #220043
Yeah at that point I’d go for all the tax deductions I could get and take my chances on future tax ratesJune 7, 2019 at 8:14 pm MST #220044