Benefits of Opening a Pre-Tax Retirement Plan

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Retirement plans and/or accounts can benefit your clients in many ways, especially if there is a need for them to reduce their tax liability. Clients who have seen their tax liability increase when filing their 2018 tax returns would be ideal people to start a conversation with. These individuals have seen their tax bill go up, and if they are not taking advantage of a corporate retirement plan or an individual retirement account (IRA), this may be the time to start or increase their contributions.

Typically, there are two ways clients can put money away for retirement: on a pre-tax and post-tax basis. We will simply discuss the former in this article and address the latter in the future. 

Clients who are taking part in their corporate retirement plan but not maxing out may be missing significant benefits. These pre-tax contributions go into their retirement account, many times along with an employer match, and will grow tax deferred until they remove the funds sometime in the future. Those clients who had greater tax liability last year may be able to reduce some this year by starting or raising their contributions to retirement plans. The monies that are placed in the retirement plan directly come off of their taxable income from the year, providing them with relief.

As an example, in 2019, employees under the age of 50 can defer a maximum of $19,000 into their company’s 401(k). Clients who are in the 30-percent tax bracket could save close to $5,700 in taxes by maxing out their 401(k). Not only is this providing the client with a tax savings, but their true cost of putting away the $19,000 for retirement was only $13,300, giving them a significant benefit. The idea here is that this will lower their tax liability, allow them to put funds away for retirement and also provide years of tax-deferred growth.

Your clients will want to make sure they are taking advantage of all the benefits their company may provide with regard to retirement accounts, tax benefits, match and deferring as much as they can afford. Clients who work at companies that do not provide retirement plans may want to look at establishing their own IRA. This works very similar to what we have described with the 401(k), but the maximum they can contribute to it is $6,000 if they are under 50 years of age. 

Those of your clients who own businesses may also want to look at the benefits and disadvantages of establishing a retirement plan for their company. This would allow them to help their employees become retirement ready while helping themselves as well.

Keep in mind that this is a pay now or pay later system. By taking the tax deduction now and receiving the benefit of a deferral, you will need to pay taxes on these monies when they are withdrawn in the future. The idea is that you put these monies away while you are earning income and in a high(er) tax bracket and remove the monies in retirement when you are in a low(er) tax bracket. 

This strategy, like many other financial planning principles, contains many variables and assumptions that may not remain constant. As an example, if tax rates go up significantly in the future, you could be paying more in taxes when you remove the funds than you would have when you put them into the account. This is why you need to have an overall retirement strategy that will provide you with taxable, tax-free and tax-advantaged income in retirement.

After a grueling tax season, you can use this to start a conversation with your clients to help you build, maintain and solidify your relationships. Now that the first tax season with the recent changes are complete, you know exactly how your clients are being affected. Meeting with those who had a higher liability or tax surprise in 2018 and looking at their contribution, or lack thereof, to retirement plans may provide them with real value. This conversation may help them alleviate some of the burden and also help them become retirement ready by having more saved.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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About Lawrence Sprung

Larry Sprung

Lawrence Sprung CFP® is the President and Founder of Mitlin Financial, Inc. He entered the financial industry in 1996 and continues to be inspired and energized by the challenge of helping his clients achieve and even surpass their financial goals.

Mitlin Financial, Inc. is an SEC Registered Investment Advisor (RIA) that prides itself on facilitating their client's financial future.  Being a fiduciary is a perfect fit for Larry’s personality and business perspective as he puts clients first and consistently helps them make decisions that are right for them.

Larry is known as a devoted educator. He is a frequent speaker at industry conferences and regularly films the firm’s “Mitlin Minute,” which is designed to provided information regarding relevant financial topics.

Today, Larry is proud to be serving the second and third generations of his clients. He has seen first-hand how strong financial habits instilled in parents, children and grandchildren, can impact a family’s wealth and wealth stewardship for generations.

As an active volunteer, Larry serves on the National Board of the American Foundation for Suicide Prevention (AFSP).  With his wife, Denise, he has raised more than $1,000,000 for the organization through the Keith Milano Memorial Fund. The fund was created at AFSP in memory of Larry and Denise’s brother-in-law and brother, respectively.

Larry has been recognized as one of Long Island Business News' "40 Under 40," and his commentary is regularly featured in publications such as Long Island Business News, U.S. News & World Reports, Newsday, Investopedia, Yahoo Finance, and Nasdaq’s website. 

If you have the pleasure of meeting Mr. Sprung, you will find that he is more often found conversing about AFSP, his sons’ or a hockey game. Doing business and creating relationships is at the heart of who Larry is and it is all done with style and grace.


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