Unleashing Tax Savings by Optimizing Retirement Saving Techniques
Whether you own your own business or are a hardworking individual, the endless sea of potential tax-saving strategies can be overwhelming. Paralysis by analysis sets in. Let's face it, managing a business or career, tending to family needs, and attempting to get a good night's sleep already fill your plate. Staying on top of ever changing tax regulations and how to realistically save for your retirement goals may feel like an unattainable and distant dream, but here is a simple guide to make it a reality.
Here are three potential solutions to elevate your financial well-being whether you're a small business owner or part of a larger corporation, there's something valuable for you in this pursuit. Maximizing your retirement savings is a powerful, yet often underutilized tax saving tool.
Please note that all contribution amounts are based on the 2024 limits set by the IRS. While there are numerous factors to consider when selecting a strategy that's right for you, it's essential to consult with an advisor before making a decision.
SEP IRA (Simplified Employee Pension Individual Retirement Account):
SEP IRAs are one of the easiest retirement savings plan options for small businesses to set up and maintain. These accounts allow employers to make contributions to retirement accounts set up for themselves and their employees. While almost any type of business is eligible to establish a SEP IRA, the SEP IRA is ideal for small business owners with a few employees or self-employed individuals. Contributions to these accounts are made by the employer on behalf of the employee (including yourself) up to 25% of each employee’s income or $69,000. SEP IRAs have minimal administrative responsibilities, a straightforward setup, and you, as the business owner, maintain complete control of contribution amounts allowing you the flexibility to adapt strategically with your business.
Employer contributions to retirement plans offer significant tax savings benefits. These contributions are tax deductible for the business, reducing its taxable income. Additionally, employee earnings within these plans grow tax-deferred, meaning they are not taxed until withdrawal. This tax deferral allows for potential investment growth over time, benefiting both the business and the employees.
Individual 401(k):
Self-employed business owners can benefit from both pre-tax and Roth salary deferrals, along with employer contributions, by utilizing an Individual 401(k) to maximize contributions and reduce taxable income. If you're self-employed or manage an owner-only business, such as sole proprietors, corporations, partnerships, or tax-exempt organizations with no employees other than a spouse, an Individual 401(k) plan offers the opportunity for significant retirement contributions. Contributions to this plan can be made by both the employer and the employee. Employer contributions, often in the form of profit-sharing, are tax-deductible up to 25% for individuals or 20% if self-employed, effectively reducing the taxable income of the business. Profit-sharing contributions are flexible and do not have to be made annually, allowing the business to adapt each year according to its performance.
In 2024, employees can defer up to $23,000 in pre-tax salary, reducing their taxable income. Employees who are 50 or older can make catch-up contributions of an additional $7,500, bringing the total to $30,500. Post-tax or "Roth" deferrals can also be used either instead of or in combination with pre-tax deferrals. The maximum contribution limit from all sources is $69,000, or $76,500 for those 50 and older.
While an Individual 401(k) involves slightly more administrative responsibilities compared to a SEP IRA, the requirements are still minimal. The IRS does require the filing of Form 5500 annually when plan assets reach or exceed $250,000.
401(k) or 403(b):
Businesses of all sizes commonly provide traditional 401(k) plans, granting employers the flexibility to contribute to their employees' retirement savings in various manners, while also enabling employees to save and invest according to their preferences. If you own a business with employees, a 401(k) plan is likely the best solution available for you. For employees who have a 401(k) available as part of their compensation package, the following offers general guidance. However, it's important to note that each 401(k) plan is unique, and different rules and provisions may apply.
Similar to the Individual 401(k), contributions to a standard 401(k) can be made by both the employer and the employee. Employer contributions can take various forms, such as profit-sharing, discretionary match, or a Safe Harbor match. On the other hand, employees have the option to defer up to $23,000 in pre-tax salary deferrals, which lowers their taxable income immediately. Additionally, employees who are age 50 or older may make catch-up contributions of up to $7,500, bringing the total to $30,500.
If a specific plan allows, post-tax or "Roth salary" deferrals may also be used either instead of or in combination with pre-tax deferrals. If an employer offers a match, it is crucial for employees to contribute at least the amount needed to take full advantage of the employer's matching contribution, as this essentially represents free money. The maximum contribution limit from all sources is $69,000, or $76,500 for those age 50 and older.
Next Steps
Choosing the right retirement plan and how much to save hinges on factors like business structure, financial goals, and the desire for flexibility in contributions and administrative responsibilities. Within any of the retirement plans, a variety of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs) may be utilized but need to be intentionally aligned with your overall strategy. Additionally, it's common for individuals to have multiple 401(k) plans from previous employers or various retirement savings accounts. To maximize the benefits of all your savings, we can assist in consolidating them into a comprehensive financial plan tailored to your life goals.
For self-employed individuals or business owners, consulting with a financial advisor is crucial to receive personalized advice tailored to their unique financial situation, ensuring optimized planning and growth strategies for their business and personal finances. Let us focus on you, so you can focus on what matters most.
*Referenced docs
https://www.irs.gov/retirement-plans/one-participant-401k-plans
*The foregoing content reflects the opinions of Van Hulzen Asset Management DBA "Van Hulzen Financial Advisors" and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.