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Client Case Study I

Client Profile: Husband and wife within 5-7 years of retirement. Husband is self-employed and wife is a full-time employee with good benefits. She has consistently participated in company sponsored 401k plans and he established an individual IRA prior to running his own business. He is the sole employee of his own company. Over the course of their careers, they have accumulated more than $1.2 million for retirement and have fully funded their daughter’s college tuition and expenses. The majority of their accumulated savings are held in traditional IRA accounts with a small balance in a taxable account. For many years, the husband’s business has been essentially breakeven after paying himself a modest salary. They experienced a liquidity event in December which triggered a tax liability.

Standard Advisor Option: To set aside some of the proceeds to cover expected tax liability and add the remainder to their taxable managed investment account.

Value-added Solution: Alpha Wealth Advisors recommended an alternative allocation of the proceeds from the liquidity event. First, establish Roth IRAs for both husband and wife and make maximum contributions for current and subsequent tax years. Second, establish a solo 401K Plan for husband’s company and make maximum contribution ($26,000 employee deferral). Because he is the only employee of his company, he was able to pay himself a one-time bonus, (grossed up so that the net after FICA would be $26,000), establish the solo 401k and deposit $26,000 into account, thereby creating a $26,000 tax deduction for the business. The business can make a profit sharing contribution as well. Once the company income and expenses were passed through to the husband and wife, the retirement plan contribution had the added benefit of offsetting the tax liability triggered by the liquidity event. The remainder of the proceeds from the liquidity event were added to the taxable managed account. Alpha Wealth Advisors collaborated with the clients’ CPA to make sure the transactions were fully reported and in line with current tax requirements.

At the conclusion of the transaction, the clients had additional funds in their tax advantaged retirement accounts and saved approximately $10,000 in tax liability. While the fee income for Alpha Wealth Advisors would have been the same in the standard option as it was in the value-added solution, the benefit to the client was significant.

Alpha Wealth Advisors offers more than investment advice. We offer financial solutions.