Word is Out: IRS Secrets You Should Know
by Lance Wallach
Substantial tax reduction, estate planning and asset protection.
VEBAs, anyone? Do you pay too much income tax? Are you interested
in protecting your assets from creditors? Would you like incredibly
large tax deductions every year? How about providing financial security
for your family while minimizing taxes? Sound interesting? If so,
you should consider utilizing a VEBA, a Voluntary Employees Beneficiary
Association. All contributions are tax deductible and money can
come out tax free for certain benefits.
Profitable businesses looking to substantially reduce their tax
liabilities and protect their assets from creditors can also utilize
Although they have been in existence since 1928, VEBAs are not well
known or understood. They allow an employer to receive a current
tax deduction while putting away funds that are not currently needed.
They also give the employer a great deal of latitude in choosing
VEBA assets are protected from the claims of creditors. The amounts
in which contributions are made can be flexible, and benefits are
highly favorable to the business owner. Additionally, a VEBA can
allow you to deduct life, health, disability and long-term care
insurance and also solve retained earnings problems. An employer
can maintain both a retirement plan and a VEBA simultaneously.
A VEBA allows larger tax-deductible contributions than a 401(k)
plan because it is not subject to the same strict pension plan guidelines.
There are, however, numerous other plans being sold that look like
VEBAs but may get you into IRS trouble, so be careful.
412(i) Fully Insured Defined Benefit Plans
412(i) plans continue to generate both interest and caution following
recent Internal Revenue Service and Treasury Department actions
to crack down on a number of abusive schemes that had cropped up
in this marketplace.
Many accountants prefer S corporations for their clients. This allows
the client to have large amounts of income without worrying about
excess profits, accumulating retained earnings, dividends or double
taxation of profits. However, since W-2 wages are subject to payroll
taxes and passive dividend income is not, many S corporation owners
limit their W-2 wages to modest amounts and pass through the majority
of the client's income free of payroll tax. While this may make
tax-planning sense, it may dramatically curtail the amount of permissible
retirement plan contributions, which may only take W-2 wages into
But a 412(i) plan contribution may far exceed 100 percent of compensation.
We have seen cases where tax deductible contributions in excess
of $200,000 annually for a single participant were allowed. For
example, a W-2 wage of $50,000 would permit a maximum SEP-IRA contribution
of $12,500 for a 50-year-old, but will allow a 412(i) contribution
of over $75,000. Care must be exercised, though, to assure that
a 412(i) plan is properly designed and funded.
While a completely tax free environment may not be legally possible,
most of us can come a lot closer to it. The choice is simple: pay
yourself or pay the IRS*.
Lance Wallach speaks and writes extensively about Voluntary
Employees Beneficiary Associations, retirement plans and tax reduction
strategies. He will be speaking at the Americas Glass Association
Glass Expo'06 in Anaheim on May 12-13, 2006.
* The information provided in this article is not intended
as legal, accounting, financial or any other type of advice for
any specific individual or other entity. You should contact an appropriate
professional for any such advice.