Year-end income tax reduction strategies: the good, bad and uglyArticle added by Roccy DeFrancesco on October 12, 2012
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

It’s that time of year and if you aren't talking to your business clients and potential clients about year-end income tax reduction opportunities, you're making a mistake. Let’s get right into it.

Captive insurance companies (CIC)

This is hands down the most powerful wealth-building tool a client has at his or her disposal. The business can take a deduction from between $100,000 to $1.2 million where the vast majority of the premium inures to a CIC they and/or their heirs own. CICs have nothing to do with employees and can eliminate not only income taxes, but also estate taxes.

Qualified retirement plan options

401(h) plans I’m starting with this unknown plan because it is the most powerful qualified plan available and most advisors have never even heard of it. This plan is funded with deductible dollars where the money is allowed to grow tax free and can be removed tax free.

401(k)/profit sharing plans — Boring. Everyone is talking about these.

Roth 401(k) plans — Mathematically superior to tax-deferred qualified plans but limiting in application.

Double advantage safe harbor plans (DASH plans) — More exciting. These plans use unique plan designs to minimize contributions for employees and maximize them for business owners.

Defined benefit (DB) plans —Overrated. Using a stand-alone DB plan is boring and not the most effective use of such plans for business owners.

412(e)3 DB plans— Way overrated. Stay far, far away from using cash value life insurance in these plans. Doing so is not in the client’s best interest, no matter what some IMO or insurance company tells you.

Cash balance (CB) plans — This is a unique type of DB plan that is more flexible than regular DB or 412 plans and can help you really discriminate in favor of business owners.

Super 401(k) — This is a plan that combines 401(k)s/PSPs/DB plans in the most legally discriminatory way.

Section 79 plans — This is one of the most overrated plans in the industry today. The math does not support offering these plans to your clients. Also, most of the time, these are sold improperly when it comes to covering employees. To read more on what’s wrong with Section 79 plans, please read part one and part two in my series, "Section 79 plans: Why you shouldn't sell them."

419 plans/VEBAs — These plans were so abused, the IRS basically killed them. There is a narrow use for these plans, but most administrators do not set them up correctly. Your best bet is to avoid these plans.

NQDC plans — NQDC plans are not deductible plans for business owners. They are a non-deductible purchase of life insurance.


Again, it’s go time when it comes to helping clients reduce their income taxes prior to year end. Helping your clients reduce their taxes and grow their wealth will help you provide better advice and grow your own wealth.
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