Background:
Jane and John are a professional couple in their early 40s with prominent business careers. With their joint annual income exceeding $1.2 million, they have enjoyed a comfortable lifestyle and built significant wealth. However, as their earnings have grown, so too have the complexities surrounding their finances, especially with regards to taxes.
Challenges:
- Elevated Taxes: Being in the highest tax bracket, Jane and John faced substantial federal tax obligations. Their investments further added to their tax burden.
Inefficient Asset Allocation: Because they were so busy, they neglected their investments and had not yet created a Retirement Plan to focus how they should be investing. As a result, their portfolio was a mixture of inefficient mutual funds and idle cash.
Underutilization of Tax Advantaged Accounts: Despite having a 401(k) plan, they were not maximizing their contributions and they were unaware of the benefits of a Cash Balance Plan.
Estate and Inheritance Tax Concerns: The couple wanted to ensure their two children would inherit the majority of their estate without hefty tax implications.
Solution:
- Comprehensive Tax Planning: Our team conducted a thorough review of Jane and John’s financial situation. Recognizing their immediate need, we collaborated with their CPA to design a tax-minimization strategy tailored to their unique situation.
- Diversified Asset Allocation: We transitioned a portion of their portfolio into tax-efficient investments reducing their taxable income.
- Maximizing 401(k) Contributions: We advised the Jane and John to maximize their pre-tax contributions to their respective 401(k) plans. This move not only helped reduce their current taxable income but also ensured that they were saving efficiently for retirement.
- Introduced the Cash Balance Plan: As high-earning business owners, Jane and John qualified for a Cash Balance plan, which allows for larger tax-deductible contributions than a traditional 401(k). With this strategy, they could significantly reduce their income taxes.
- Estate Planning Integration: Together with estate planning attorneys, we helped them set up trusts and gifting strategies that will reduce future inheritance taxes and ensure their wealth benefits their children and potentially even their grandchildren.
Results:
With the full utilization of 401(k) and Cash Balance plans, Jane and John can now shelter over $300,000 of their income from taxation. Their revised retirement strategy, inclusive of the Cash Balance plan, means they are on track to retire by 60, with a projected post-tax income that sustains their current lifestyle. Estate planning measures offered them peace of mind, knowing their children's inheritance is secure.
Conclusion:
For high-earning professionals, the intricacies of financial planning go beyond basic retirement accounts. By leveraging advanced tax-sheltering tools like Cash Balance plans, professionals can ensure they are not only minimizing tax burdens, but also setting themselves up for a comfortable future. Our firm's holistic approach empowered Jane and John to harness their full financial potential.