Supersize Your Retirement Account

At the age of 40, my friend Al really hit a sweet spot in his medical career. He now puts close to $140,000 per year into his retirement accounts — tax-free.

That might sound impossible given that the contribution limit for a 401(k) plan this year is just $19,500.

But it is doable if you know what you’re doing.

My advice today is only relevant if you’re over 40 and earn a high income of at least a couple hundred thousand dollars as a business owner. If that’s not you, don’t fret. Simply maxing out your 401(k) every year will get you well on your way to financial freedom.

But if you happen to over 40 and are enjoying a nice run in your business, you have options that are simply not available to the rank and file.


OPTIONS TO MAX OUT YOUR ACCOUNT

Al has a 401(k) plan, just like you and me. And he maxes his account out every year.

But he also pairs his 401(k) plan with a good old-fashioned defined benefit pension plan and gets to dump in an extra $100,000 as a result.

These are how the numbers shake out.

As I mentioned earlier, the current maximum salary deferral in a 401(k) plan is $19,500. That max gets bumped up to $26,000 if you’re 50 or older — though my friend Al is not.

Additionally, he’s able to stash away up to 6% of his salary via profit sharing, which also gets put in the 401(k) plan. The IRS caps the salary you can use in the calculation at $285,000, making his maximum profit-sharing contribution $17,100 for 2020.

It’s worth mentioning that his income is much higher than $285,000, but the IRS limits the salary you can use for matching or profit-sharing purposes to that figure.

Between the 401(k) salary deferrals and the profit-sharing, he’s able to shield $36,600 from the taxman in 2020.

And now let’s get to the fun part.


THE ART OF SUPERSIZING

He supersizes his account with an additional $100,000 by contributing to a defined benefit pension plan. If he was older and closer to retirement, that number could actually be a good deal higher.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not ...

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