Sunday, September 20, 2015 – Knoxville News Sentinel by Sharon Pryse
Employees are generally the most valuable asset for a business, and a 401(k) can be a strong incentive to keep those individuals. A 401(k) plan can help the employee assume responsibility for his or her own retirement and provide an employer incentive for doing so.
For the business owner, it can possibly provide some pretax savings options which are often few and far between.
Traditional IRAs provide an easy path, but may not allow for contributions as large as in a 401(k).
Contributions can be made pretax, can qualify as business expenses, and can grow tax deferred until withdrawn no matter the business owner’s marginal tax bracket. Depending on the individual’s income, making contributions may also keep the owner’s tax bracket lower than it would’ve been had contributions not been made.
Roth contributions (after-tax deposits that grow entirely tax-free/not deferred) are also possible no matter the owner’s or employees’ tax brackets. This is an extremely useful tool for retirement, estate, and/or legacy planning as Roth account distributions remain tax-free for beneficiaries and heirs, too.
For 2015, an individual can save $18,000 in a 401(k) plan ($24,000 if over age 50), and “the business” can contribute up to another $35,000 ($41,000 if over age 50) for the year, too. Since “the business” often equals the business owner, this is less income today but more for retirement savings (and income) in retirement, no matter when “retirement” may be.
In other words, if you are an employee of the business in addition to being the owner, you may be able to save significantly for retirement as a business expense, while also benefiting from the pretax options.
If the business employs more than one person, additional contributions will likely be required to satisfy IRS and Department of Labor testing requirements, but additional contributions are normally much less than what the owner receives.
As with any financial planning, it is important to get expert advice. If contributing to a qualified plan ? 401(k), etc. — it’s even more important to discuss the goals and strategies with someone versed in rules imposed by the Labor Department to avoid potential penalties or additional taxes owed.