In this last segment of my summer long series on "Planning and saving in a low interest rate, high tax rate world", I cover in greater detail one of our foundational planning ideas, that being the conversion of taxable damage awards or legal fees into tax deductible, tax deferred retirement plan accounts.
No other strategy offers the tax savings, security and conservative approach as this time tested application of the income deferral ability of a structured settlement and the tax deduction and accumulation of a qualified retirement plan.
The concept is simple, take your taxable damage or legal fee award, and depending on the size of it, work with a settlement professional to structure it, or spread it out over, several years. The idea being that each of those years and future payments will be dedicated in whole or in part to deposit into a qualified retirement plan that converts the taxable income into a tax deductible contribution to your IRA, Defined Contribution plan or Defined Benefit retirement account. Just a quick summary on what each account is and the contribution limits for retirement plans for the 2010 tax year:
IRA CONTRIBUTIONS FOR 2010: Under age 50, the limit is $5000 and over age 50 the limit is $6000
SEP OR DEFINED CONTRIBUTION LIMITS FOR 2010: $49,000, however each plan has compensation measurements that need to be calculated with the assistance of your CPA or tax professional.
DEFINED BENEFIT PLAN INCOME LIMIT FOR 2010: $195,000 annual retirement income cap is used for allowable DB plan deductions. DB plans require the use of a certified actuary and are not for first timers or the do it yourself crowd!
Obviously, we could write a book on each of the types of plans, but the key to this is that you have options depending on your case, income and situation and you need to work with a professional in order to make sure that the plan operates as intended and is in compliance with IRS and ERISA regulations. The key is to talk to a retirement or settlement planning professional about your unique situation and how these deferral strategies could apply in your situation.
You can contact me through my home page at Wahlstrom & Associates to learn more about these powerful tax and retirement planning strategies.