Use Section 404(a)(6) to help clients take pension deductions for 2009
By Roccy Defrancesco
The Wealth Preservation Institute
I had lunch last week with my pension expert for the Wealth Preservation Institute, John Lalonde. Nearly every time we have lunch, he brings up a topic I should discuss in my articles.
This time, it was the use of IRC Section 404(a)(6) to help clients take what will seem like a retroactive tax deduction for contributions to a pension plan for last year (2009).
How many of our profitable, small-to-medium size business clients come to us after April 15 and tell us they wish they could have deducted $10,000-$100,000 or more into a pension plan for the prior year? If you have any number of profitable small business owners as clients, the answer is that many of them say this after the fact.
The typical advice from a CPA, financial planner, or even a tax attorney is what? "Sorry, you missed your window of opportunity to make a deduction for the prior year." If these advisors knew of IRC Section 404(a)(6), they would be able to tell many of their clients that all hope is not lost, and that they may still be able to make a contribution to a pension plan for the prior year, even though April 15 has passed.
What does IRC Section 404(a)(6) say?
It says that contributions may be made to newly created pension plans up until "the time prescribed by law for filing the return for such taxable year (including extensions thereof)."
In layman's terms, what it means is that business clients can make contributions to a newly created pension plan until the late corporate filing deadline for tax returns (and those who already filed can amend the return and still take the deduction). How cool is that?
It's really great to be able to go to a profitable business owner who's complaining about taxes and tell him/her that there is a way that they can still take a tax deduction for the prior year, even though April 15 has already passed.
You'll be rock star to these clients.
New clients. What may be better is that you can use this new-found knowledge to pick up new clients. Picking up the pension plan of a new client is very difficult. However, when you bring something of value that their current advisors do not provide, you have a fighting chance. I would submit to you that by knowing and discussing IRC Section 404(a)(6) you will be able to pick up new affluent business clients.
The limiting factor. The limiting factor with IRC Section 404(a)(6) is that, in order to take this retroactive tax deduction, the plan being funded must be "new." So, this code section will not help clients who have a current 401(k)/profit sharing plan (PSP) take a retroactive deduction.
However, if you have a client who has only a 401(k)/PSP, they may be a perfect candidate for a cash balance plan (also known as a carve-out plan) or a 401(h) plan. Adding on such a plan will allow the client to significantly increase deductions to the plan; and because of IRC Section 404(a)(6), clients who wish they took the deduction for the prior year will not be able to do so.
To read the entire text of code section IRC Section 404(a)(6), please click here.
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