Author Topic: Business Sale Windfall: Cash Balance Plans?  (Read 618 times)

Bryce~Gibson

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Business Sale Windfall: Cash Balance Plans?
« on: August 30, 2021, 02:17:35 PM »
SO, after a number of years earning $50-100K as a self-employed product designer (mostly royalties), I was able to get a client to buy me out of a license earlier this year which, combined with some other odds and ends has me looking at a YTD profit of $500K *after* my salary and benefits.  My question is: how do I spread this out to reduce the tax exposure? 

I don't need the cash right now and my accountant suggested looking into funding a Cash Balance Plan.  From what I understand is that would be a pension that I fund in TY2021 as a business expense and draw down / benefit from over time.  Does anyone have any thoughts on this approach or other clever ideas? 

  • 43 y/o
  • Married filed jointly (wife ~$60K this year)
  • Living in Colorado
  • No kids/dependents or plans for either
  • Expenses under control, good to retire in 1-2 years
  • Debt includes low APR mortgage and very low APR auto loan
  • Cash is in hand, too late for structured sale
  • Don't really want to buy a ton of (whatever) to expense as COGS and sell later
  • Bought PHEV in March ($7.5K fed + 2.5K state tax credit) and about to sign on solar ($5K or so credit) but open to other tax-beneficial home efficiency improvements
  • Don't need new business vehicle, could be a wash and not worth the hassle if I sold our 2018 in current used car market

Not looking to get too crazy/exotic/sketchy, but basically received my next 4-6yrs income all at once and would like to spread it out a bit as I head into retirement.  Would love to hear your thoughts!  Thanks all :)

SeattleCPA

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Re: Business Sale Windfall: Cash Balance Plans?
« Reply #1 on: August 31, 2021, 06:56:40 AM »
I'd make sure you get a 199A deduction so only $400K is subject to tax...

I'd probably consider trying to load up a solo 401(k) with the max...

If it were possible to stack itemized deductions in 2021, that'd be reasonable...

Probably would not do a DB plan. Pretty expensive in terms of fees? You're supposed to run them for a few years?

skuzuker28

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Re: Business Sale Windfall: Cash Balance Plans?
« Reply #2 on: August 31, 2021, 07:13:11 PM »
I'd make sure you get a 199A deduction so only $400K is subject to tax...

I'd probably consider trying to load up a solo 401(k) with the max...

If it were possible to stack itemized deductions in 2021, that'd be reasonable...

Probably would not do a DB plan. Pretty expensive in terms of fees? You're supposed to run them for a few years?
+1 on this.  There is a "presumption of permanence" for a Cash Balance plan, and I think you'd have a hard time making an argument that you intended this plan to be permanent if you are setting it up after the buy-out.  Unfortunately, a lot of options that could be considered need to be set up prior to the transaction or they fall into the sketchy side of things.

Loading up a Solo401(k) is definitely an option, as is making a big contribution to a Donor Advised Fund if you have future charitable aspirations.

Bryce~Gibson

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Re: Business Sale Windfall: Cash Balance Plans?
« Reply #3 on: September 02, 2021, 01:05:58 PM »
Good points, thank you both.  Looks like I'll set the DB plan idea aside.

 

Wow, a phone plan for fifteen bucks!