Small business owners can play catch up for retirement and dramatically reduce their tax liability with a stacked approach to Cash Balance Pensions on top of a Profit Sharing &l;a href=&q;http://www.financialplannerla.com/how-to-solo-401k/&q; target=&q;_blank&q;&g;401(k) plan&l;/a&g;. With potential tax savings north of $100,000 per year it&a;rsquo;s hard to believe more people aren&a;rsquo;t talking about this type of retirement planning technique. For high-earning business owners, a cash balance may hold the key to securing a comfortable retirement.
A prospective client recently left a voicemail and said, &a;ldquo;I just read your post about pension plans for small business owners, why didn&a;rsquo;t my CPA tell me about this?&a;rdquo; (link). She also missed the basic opportunities to save more for retirement with a &l;a href=&q;https://www.forbes.com/sites/davidrae/2018/04/07/sep-ira-2017-taxes/#a039dd09d274&q;&g;SEP IRA&l;/a&g; or Solo 401(k) plan. Instead, her tax pro had her only contribute $6,500 per year to a Roth IRA (she is over 50). This was not going to give her a secure retirement or allow her to catch up on what she should have been saving.
Additionally, this individual had saved more than $100,000 last year. Most of that money was in her checking account, which meant she was unable to receive a tax deduction and only able to earn miniscule interest from the bank. These issues will be corrected for 2018 and beyond.
&l;strong&g;Business Owners and Retirement Challenges&l;/strong&g;
&l;a href=&q;http://www.financialplannerla.com/small-business-tax-stress/&q; target=&q;_blank&q;&g;Running a business is stressful &l;/a&g;and cash flow can be an issue much of the time. You keep reinvesting in the business to help it continue to grow. The goal being to eventually cash out, sell the business and be set for life. Or perhaps you love what you do, and can&a;rsquo;t imagine ever retiring. Not to be a Debbie Downer, but the reality is not many businesses sell for enough money to allow for what could be a 30-year retirement.
For those who decide they want to retire someday, getting serious about saving and, in a lot of cases, playing catch-up is often the case. Minimizing taxes can make that process run more smoothly.
&l;strong&g;Small Business Retirement Plans&l;/strong&g;
There are a variety of ways to save for retirement when you own your business. I normally help people pick the best plan for them based on what they want to save and what they need to save. Some use a Roth IRAs or Traditional IRAs while others use &l;a href=&q;https://www.forbes.com/sites/davidrae/2018/04/07/sep-ira-2017-taxes/#5000047a9d27&q;&g;SEP IRAs&l;/a&g;. Still, Solo 401(k) plans are quickly growing in popularity due to decreased costs and ease of use. These plans may be the best bet when looking to save larger amounts. For those trying to minimize taxes and put away every single dollar into tax deferred accounts, check out a 401(k) /&l;a href=&q;http://www.financialplannerla.com/cash-balance-plan/&q; target=&q;_blank&q;&g; Cash Balance Plan&l;/a&g; combination.
&l;strong&g;What is a 401(k) Cash Balance Pension Plan Combo?&l;/strong&g;
Pension law will allow a company to essentially stack a cash balance pension plan on top of a 401(k) plan. When structured properly, small business owners have the ability to put tens of thousands of additional dollars into retirement accounts each year. Did I mention you get a tax deduction for each and every dollar you contribute?
&l;strong&g;What are the downsides to a Cash Balance Plan?&l;/strong&g;
If you have employees, you will likely need to make profit sharing and offer a matching contribution for them if you truly want to make the maximum contributions for yourself. For 2018, a 401(k) would allow you to put away up to $55,000 plus an additional $6,000 if you are over 50. Additionally, you may be able to put up to $100,000, or more, into a &l;a href=&q;http://www.financialplannerla.com/personal-defined-benefit-plan/&q; target=&q;_blank&q;&g;Cash Balance Pension plan&l;/a&g;. Contributions will vary depending on your age, income, employee payroll and how much you already have invested in the plan.
Pension and 401(k) plans often have set up costs and may require ongoing record-keeping charges. If you have a pension plan, you will also likely be required to have an actuary review the plan to keep it compliant. While not cheap, the cost of these types of plans pales in comparison to the potential tax savings.
The biggest drawback for pension plans is that you will likely need to commit to minimum funding levels for about five years. The minimum levels are based on your business profits. If business declines, your commitment will be lowered.
Keep in mind the contribution for your employees are also tax deductible. With proper planning, much of the funding can go towards the owner. The plan I funded this week had 85% of the company&a;rsquo;s money going to the owner of the business. These percentages will vary depending on the size of the business, payroll, etc.
&l;img class=&q;dam-image shutterstock size-large wp-image-1092085457&q; src=&q;https://specials-images.forbesimg.com/dam/imageserve/1092085457/960x0.jpg?fit=scale&q; data-height=&q;640&q; data-width=&q;960&q;&g; Don&s;t feel stressed about retirement. Work with a Fiduciary Financial Planner to do the heavy lifting of a Cash Balance Pension Plan (Shutterstock)
&l;strong&g;Who should consider a Pension / 401(k) Combo Stack Plan&l;/strong&g;
&l;p class=&q;tweet_line&q;&g;Self-employed or small business owners, with high incomes, are drawn to these types of plans. Higher income results in more tax liabilities that these individuals want to minimize. Similarly, the more you make the more you will need to save for a comfortable retirement. With a combo you could potentially stash away $150,000 per year pre-tax, perhaps even more.
While these plans are a great option to consider for anyone wanting to play catch-up for retirement, self-employed or small business owners, who are able and want to sock away large amounts of money, could benefit from these plans as well. &l;a href=&q;http://www.financialplannerla.com/fifty-facing-retirement/&q; target=&q;_blank&q;&g;Being near 50&l;/a&g; or older helps.
If you are looking to save less than $55,000 per year, a typical 401(k) plan may be the better option. Keep the 401(k) / Pension combo on your radar if you are looking to save more now, or in the future, Your CPA or financial advisor likely will not recommend it.
Assuming the new 37% tax bracket, maxing out this plan could save you more than $55,500 in federal taxes. Also, your state tax bill will be reduced if you live in a state with income taxes. For those trying to stay below the new 20% tax break pass-through income limits, this can help in that respect as well.&a;nbsp; It&a;rsquo;s not what you make but what you keep. With that in mind, don&a;rsquo;t make strategic tax planning something you do just once a year. The cost is too dang high.&l;/p&g;
&l;strong&g;Using Pension 401(k) Stack to get more of the Pass Through 20% Tax Break&l;/strong&g;
You may have heard of the new 20% tax break for pass-through entities which started in 2018. Some of the more common examples include sole proprietors, S Corps, LLCs and partnerships. If you are running a pass-through entity that would be considered a &a;ldquo;service&a;rdquo; and the 20% deduction will phase out as your income increases. For single filers, this phaseout begins at $157,500 and will be completely eliminated on income if your income is more than $207,500 for 2018.&a;nbsp; The numbers are a little higher for married couples with the phaseout beginning at $315,000 and ending at $415,000.
Look at it this way, your retirement plan contributions will give you a deduction for contributing. Those contributions may also help lower your income threshold, listed above. If so, you will be able to maintain the 20% pass through tax break. You can either earn less money or, in some cases, write a check to yourself in the form of 401(k) and pension contributions. Which would you prefer?
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Live for Today, Plan for&a;nbsp; a &l;a href=&q;http://www.davidraefp.com&q; target=&q;_blank&q;&g;Richer Tomorrow&l;/a&g;.&l;/p&g;
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