Tax Planning for High Earners Goes Beyond the 401(k)

SPEAKER_1 (0:01)

Welcome to the Money Tree Investing Podcast. Stock market, wealth, personal finance, value stocks. Invest in your life.

Kirk Chisholm (0:11)

Hello, Smart Money Tree Podcast listeners. Welcome to this week's show. My name is Kirk Chisholm, and I'll be your host. Today, I'm joined with Colin Steinberg. How are you doing today, Colin?

Colin Steinberg (0:19)

Ready to go. Thanks, Kirk.

Kirk Chisholm (0:21)

So for those of you who don't know you, tell us a bit about your background, Colin.

Colin Steinberg (0:24)

So I started my career as a financial advisor, working for one of the large wirehouses.

Spent a lot of time helping people make money. And while I was in that process and learning in that space, I realized my career path was really going to be focused on saving people money. I found pretty early on that you can do a lot more saving folks on taxes than you can making money on investments. I drove the progression of my career from that point forward. So started as a financial advisor, moved into the high net worth life insurance space, which is a very common tool for tax planning, especially when you use it in that bucket. And have since probably in the last six years or so, moved into what is now executive compensation planning. So really trying to prepare for taxes on the front end, which is income taxes, which can have the largest impact on someone's wealth is kind of preparing for income taxes on a pretax basis.

Kirk Chisholm (1:24)

You know, if you're looking at business owners, there's a lot of ways that they can reduce taxes, but W-2 employees, there's so very few of them. What are some things that people can do to reduce taxes as a W-2 employee?

Colin Steinberg (1:37)

So there's a lot of options for W-2 employees. It's primarily about education. It's helping W-2 executives understand that corporations can set up all different types of vehicles, very similar to what they're currently using. The world that we operate in is the non-qualified planning space. So everything in under 409A, which is pretty much excess of your typical retirement plans, which is 401K, SEPs, simple IRAs, things that people are commonly putting money into.

What these W-2 employees can do is if you add a certain level of income within an organization, you can actually continue to put more money away into what's called, great example would be a deferred comp plan. A deferred comp plan is an excess vehicle that allows a W-2 executive to continue to put money away on a pre-tax basis, and then take money on an after-tax basis. It's really easy to understand that if you take a dollar and you invested pre-tax versus investing a dollar post-tax, often with the folks that we work with who are paying anywhere from 40 to 50 cents on a dollar, how much of an impact that can make on building wealth over time. That's one of the primary things we do, and I'd say we operate in the entire 409A planning space. But it's about understanding that if you are a W-2 executive, there are plenty of things that you can do. You just have to start that conversation with your executive team, your CFO, your CEO and understand how that works and work with folks like myself to begin those conversations.

Kirk Chisholm (3:11)

If somebody is an executive, they would have to get their company to add these plans. So 401Ks are common.

You said deferred comp is another way to do it. What's the difference between the two?

Colin Steinberg (3:22)

So 401K is highly regulated. It is subject to all different types of ERISA restrictions. There are limitations to how much a person can actually contribute to 401Ks and 401Ks are generally available to the entire employee population. The space that we work in is specifically for an executive level employee who has excess income and they're looking at a 401K and they're saying we can put about 23,000 or so into this on a pre-tax basis.

That's not quite enough for us to really have long-term retirement assets and build this retirement asset. So what are our options out there? And deferred comp is basically that next step. So deferred comp is under what are called non-qualified plans and non-qualified plans are not subject to any ERISA requirements. They are not subject to any what's called top hat testing. And they're really kind of accessory plans for just executive teams within an organization. And it really allows them to put themselves in position to save an equal amount relatively to their income as the rank and file employees. So that's really the genesis of these non-qualified plans is the fact that executives are all participating in the same plans. As far as saving for retirement, they have a much higher kind of hurdle that they're trying to save for.