Client Case Study: Coordinated Tax Planning to Unlock a Brighter Future

We’ve talked a lot about tax planning this month, and sometimes it helps to see some of these tax strategies in action with real-world results. Though we will not share any names in order to protect the privacy of Illumination Wealth’s clients, we want to share this case study with you. It shows how the right tax planning can make a major difference on the road to financial independence.

About the Client

This particular client came to Illumination Wealth looking for comprehensive financial advisement that had a focus on ongoing tax planning. He owns his own business that produces a healthy six-figure income and has accumulated multiple rental properties over the past 10 years. However, he did not have a coordinated tax or investment strategy. His 401(k) plan thru the business was very poorly designed which limited his tax-advantaged contributions despite having the means to save and invest more tax efficiently. He was also focused on delivering as he approached financial independence but his debt-reduction strategy that was not very efficient when it came to tax deductions.

His Illumination Wealth Strategy

He worked with Illumination Wealth to restructure his business retirement plan, investment approach and tax strategies. The goal was to maximize his tax-advantaged savings, improve his real estate cash flow and reduce his overall tax burden. Taxes are often one of the biggest hurdles any wealthy individual will face. Without the right tax planning, you can end up losing a lot of money unnecessarily to the government. At Illumination Wealth, we want to capture that money that is unnecessarily lost in taxes and use it to create additional wealth for financial independence.

For this client, we put into motion a strong financial plan to resolve his tax and debt strategy while getting him back on the road to early financial freedom. Here are some of the key points of his financial plan.

• Identified underperforming rental properties that have appreciated enough to sell and 1031 exchange, allowing for thousands of dollars in deferred taxes and reinvested proceeds producing higher cash flow.
• Redesigned the business 401(k) plan in order to allow for profit sharing contributions based on a more advantages formula to him as the owner. This maximized his contributions, resulting in $55,000 of pre-tax contributions compared to only $24,000 in prior years. That was over $30,000 of additional pre-tax savings at a tax bracket of nearly 40% combined Federal & State. You can do the math on the annual tax savings.
• Established a Cash Balance Plan to provide for additional tax-protected savings of ~$90,000 per year with only $3,000 contribution to employees. This significant contribution is now reducing taxes at his ~40% tax bracket as well.
• Rolled over SEP IRA into a 401(k) account for consolidation purposes.
• Started making Backdoor Roth IRA contributions of $5,500 per year to shift investments from taxable income to tax-free forever.
• Shift debt-reduction strategy to pay off higher-interest and non-deductible debt on an accelerated basis as opposed to fully tax-deductible low-interest rate rental property mortgages.
• Purchased a new car that was able to be completely expensed during the client’s highest income year.
• And others…

Making a Positive Impact

With the proactive advisement provided by Illumination Wealth, this client is in a much better financial position now and moving much faster towards making work optional and retirement. He has been able to save tens of thousands of dollars in additional taxes every year while contributing more to his retirement savings, wealth building investment portfolio and significantly reducing his debt. His money is now working for him thanks to the right tax planning and wealth building strategies put in place.

To learn more about how Illumination Wealth can help you with your tax planning and overall financial goals, contact us today to schedule a no-obligation consultation.