Maxed-out Retirement Plan Contributions
The average taxpayer might have difficulty making the maximum $16,500 annual pre-tax contribution to an employer-sponsored 401(k) or even maxing out a traditional IRA with its low $5,000 a year pre-tax contribution limit. High-income taxpayers, on the other hand, often have no trouble maxing out their retirement accounts because their essential expenses like food and housing make up a lower percentage of their incomes.

People who earn income as independent contractors or who have their own businesses have even better opportunities to make large retirement contributions. These options are not exclusively available to the rich; they are also available to taxpayers of lesser means. It’s just that the latter group may not be able to afford to take full advantage of tax-advantaged retirement contributions for the self-employed since they don’t have as much disposable income.

“Wealthy consultants, solo practitioners and business owners, especially those who are close to retirement, might consider establishing a defined-benefit pension plan,” says Jonathan Bergman, a Certified Financial Planner and vice president of Palisades Hudson Financial Group, a wealth management firm in Scarsdale, N.Y.; Atlanta, Ga.; and Ft. Lauderdale, Fla. “Self-employed consultants and physicians’ practices are ideal for this type of plan.”

Such plans permit very large retirement plan contributions for owners who can afford to stash the money away until they’re older.

“Retirement-plan contributions reduce current year taxable income, and once the money is in the plan, it is not taxed until it is withdrawn. This income tax deferral can reduce or even avoid state income tax permanently if the contributor relocates to a tax-friendly state during retirement,” says Bergman.

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