Accredited Wealth Management Advisor Practice Exam

If Jim Stowe needs to increase his annual retirement savings in a tax-favorable manner, what strategy should he consider?

1. Increase contributions to the money purchase plan above the allowed percentage.

2. Establish a defined benefit plan for greater immediate tax benefits.

3. Utilize a salary reduction strategy for his own compensation.

4. Set up an excess benefit plan through his corporation.

The correct answer is: Increase contributions to the money purchase plan above the allowed percentage.

The strategy of increasing contributions to a money purchase plan is a viable option for Jim Stowe to increase his annual retirement savings in a tax-favorable manner. A money purchase plan is a type of defined contribution plan where the employer contributes a fixed percentage of the employee's salary each year. The contributions made to this plan are typically tax-deductible for the business, which can offer immediate tax benefits. By maximizing contributions within the allowed percentage limits, Jim can enhance his retirement savings while benefiting from tax-deferred growth on his investments until withdrawals are made in retirement. This approach aligns with the overall goal of tax efficiency, allowing him to save for retirement effectively while leveraging tax advantages. The other choices involve strategies that come with limitations or potential issues. Establishing a defined benefit plan may require significant funding and is more complex to manage. Utilizing a salary reduction strategy for his own compensation might not provide the direct increase in retirement savings that he seeks. Setting up an excess benefit plan can be an option; however, it typically applies to top executives and is subject to compliance and regulation challenges. Thus, focusing on maximizing contributions to a money purchase plan is the most straightforward and effective method for Jim to enhance his tax-favorable retirement savings strategy.