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Sheltering income in retirement plan

I am getting a one-time stock distribution of about $245,000 from my company so I need a way to shelter about a $100,000 gain. I also have a small business and wonder how much I can put in a 401(k) or a retirement aDear Tax Talk,
I am getting a one-time stock distribution of about $245,000 from my company so I need a way to shelter about a $100,000 gain. I also have a small business and wonder how much I can put in a 401(k) or a retirement account. Thanks,
-- Donna

Article continues below and (thank you)

Dear Donna,
It's always better when you ask these questions beforehand so that it gives you time to plan. Unfortunately, you didn't give me a lot of information to work with. I'm assuming your stock distribution is the result of exercising stock options and that your $100,000 gain will be actually treated as compensation.

Depending on your current level of income and state income taxes, you might end up losing half of the bonus to income and payroll taxes. Without an adequate deduction to offset the gain, Uncle Sam stands to gain almost as much as you.

This is where the small business might be useful, but it requires that you properly plan before the end of the year in which you receive the bonus. If the small business is unincorporated, your retirement account deduction becomes a function of your net self-employment earnings from the business.

If you're incorporated, your retirement plan contributions are a function of your salary. Since your salary can be more than the net income of the business, this could increase the contribution base for a retirement plan deduction. The increased deduction would go to offset the gain from your stock options, resulting in lower overall income and taxes.

When setting up a retirement plan, you have to consider the costs of contributions that you may be required to make for eligible employees. These employee costs might limit the advantage of setting up a retirement plan. There are also plan administrative costs, but you might be able to claim a credit for these costs. Since there are numerous variables, you need to meet with a qualified CPA before the end of the year to properly plan.