Statistically Americans save very little for retirement, in fact, less than 5% percent have $50,000 or more saved for retirement. For the 5% percent, a strategy for super funding a Defined Benefit plan and 401(k) is available. This article is meant for high income earners, operating a single member S Corporation. Funding retirement plans for a high wage earner with employees is possible but very complicated without having to fund a large amount of money for employee’s retirement as well due to rules of discrimination.

The process begins with a clear understanding of the rules, as established by the IRS regarding contributions. The most important rule and the only one which this article will cover is the commitment to make at least three years worth of contributions. The significance of the three consecutive years is to establish the plan as a bona fide retirement plan and not a tax dodge for a year or two. Once past the three year period the plan can be shut down with no further contribution requirements or be reduced with smaller annual contributions. A pension administrator can cover all of the options once the plan is established.

Last year’s tax return and a current year’s profit is necessary to determine what amounts of cash funds will be available for pension contributions. A pension plan administrator must be chosen that can assist with the next step of calculating limits of contribution. As age advances so can the amounts of contribution to the plan, and as income increases so can the amount to be deposited to the plan. The wage earner can increase salary to the maximum allowable amount of contribution to the plan given the age of the contributor and the desired retirement age.

Here is an example of super funding: A single employee S Corp owner is age 44 with $52,000 in qualified retirement accounts. The present salary of $40,000 is raised to $90,000 to fund $92,360 of retirement for the year. That’s right, the owner was able to contribute the entire amount of salary and defer income tax on the entire amount. The marginal tax rate decreases and the effects of Alternative Minimum Tax or AMT may be eliminated. The owner must pay Social security and Medicare taxes on the salary. In addition to this contribution to a Defined Benefit plan the company was allowed to sponsor a 401(k) plan for its single employee and an additional $14,000 was deferred for that year for a total of $106,360.

The plan can be directed by the plan beneficiary (you) as trustee under the watchful eye of a plan administrator. The assets of the plan can be invested in publicly traded stocks or bonds, real estate, notes and other arms length assets as directed by the plan trustee. Certain type of investments and loans to the plan may force Unrelated Business Taxable Income in the year earned. Before making an investment, consult the plan administrator.

For the few single employee S Corporation owners that earn large sums of money with low overhead, this serves as yet one more way to keep earnings and allow pretax investing.

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