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The American Jobs Creation Act of 2004 imposed strict new rules
on non-qualified deferred compensation plans. Beginning in
2005, deferred compensation programs that are not in compliance
with the new rules may be taxed as wages, slapped with a 20%
excise tax, plus charged an interest penalty.
Given the potentially huge tax consequences for non-compliance
with the rules, you should consult with your organization’s
benefit specialist and your tax professionals to figure how
your compensation might be affected by these new rules.
Deferred compensation plans are often used to provide for the
deferral of salary, incentive compensation (i.e., commissions
or bonuses), or supplemental compensation for top executives,
independent corporate directors, and individual board members.
The new rules apply to nonqualified deferred compensation plans
at taxable and tax-exempt organizations.
An option for independent corporate directors and individual
board members who receive 1099 income for their services may
consider is to freeze their nonqualified plan and adopt a
qualified plan such as the “one person defined benefit plan”,
called the Solo-DB Plan. Qualified retirement plans are exempt
from the requirements of the American Jobs Creation Act.
The Solo-DB plan allows the highest deductible contributions
possible in a qualified retirement plan. For example in 2005 one
can contribute up to $170,000 of compensation into a tax-deferred
Solo-DB plan.
Defined benefits plans have been around for a long time. But,
recent pension legislation has raised the contribution and
deductibility limits as well as simplified plan fund
requirements. Thus, defined benefit plans like Solo-DB have
become much more attractive to upper-income individuals with
self-employment income. The Solo-DB plan will allow you to
aggressively fund your retirement while cutting your taxes
significantly.
Individuals who qualify for the Solo-DB plan include sole
proprietors, independent contractors, and small business owners
age 45 or older who can contribute more than $41,000 annually
to the plan for at least three years.
For more about Solo DB plans visit Lamaute Capital at:
http://www.InvestSafe.com.
Writer's Resource Box:
Daniel Lamaute, CEO of Lamaute Capital, Inc. (www.InvestSafe.com)
specializes in setting up retirement plans. You may visit
http://www.investsafe.com to access a free calculator that will
help you estimate what your maximum contribution might be under
different plans.
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