Retained Earnings - Qualified Retirement Plan

[AllThingsForGood]

How can a company’s owner “use up” his Retained Earnings by utilizing/opening a qualified retirement plan?

I know a tiny bit about accounting, and I have a potential client (architect) who wants to reduce his RE by opening a Profit Sharing/Cash Balance combo.  He's 59 years old.

Advice?  Knowledge?

Thank you!

[CuseFan]

A company's contributions to a retirement plan can come from either it's current profits or retained earnings. However, the company's accountant should be consulted with respect to tax deductions, if they would be limited to current profits, or provide any lookback or carry forward opportunity. I know there used to be very limited lookback deductibility but maybe not any more. Contributions not currently deductible can be deducted in the next year but need to take care in not depositing non-deductible amounts in a current year.

Contributions and deductions will also be limited by the 415 limits and eligible payroll. If he's an architect with few or no employees then a CBP would be PBGC-exempt and any DCP would have to be limited to 6% or eligible payroll employer contribution or be subject to a 31% of payroll combined deduction. In those instances, including a 401(k) provision adds opportunity for another $30k.

I assume C-corp tax status and wanting to avoid the double taxation on paying out those retained earnings? There will eventually be tax again on those amounts when ultimately distributed from their final tax-deferred resting place, whether a qualified plan or subsequent rollover IRA.

[AllThingsForGood]

CuseFan, thank you so much.  Your answer is extremely helpful.  I absolutely would ask for the CPAs direction - but I wanted a basic understanding for my initial meeting with the client.

I appreciate this.

[Luke Bailey]

Note that IRC section 4972 imposes a 10% excise tax on nondeductible contributions.