If you participate in a 401(k), you’re among the millions who utilize this option for retirement planning. These plans are great for socking away pretax dollars to fund your lifestyle once you leave your job. There are tax benefits, as well as the potential to fund your entire retirement without the help of Social Security. However, 401(k)s aren’t just good for employees. With proper planning a 401(k) can be an excellent benefit for a business owner as well.
We recently met with a small business client, who produces around $2.5 million in gross revenue a year, and their CPA. The owners, a husband and wife team, each earn $75,000 a year in W-2 wages and the business saw a profit of just over $297,000. The pair splits that amount 50/50 between them. They are an extremely frugal couple when it comes to their money. They carry no debt and spend roughly $6,000 a month on living expenses. Their frugality is obviously one of the keys to their success.
Basically, they’re making almost $450,000 a year in taxable income. Before they incorporated 401(k) planning into their business model, it wasn’t unusual for them get tax bills ranging from $150,000 to $180,000 a year. Since their implementation of a 401(k) plan, their combined tax bill is down to $63,000! Here’s how. (For related reading, see: 401(k) Plans for the Small Business Owner.)
How Small Business Owners Reduced Their Tax Bill With a 401(k)
They placed $106,000 of their income into the plan. Utilizing employee contributions, safe harbor contributions and profit-sharing contributions, they amassed huge savings. The cost of implementing this 401(k) plan was just $3,000. Their employee contributions combined with the employee portion of the profit-sharing contributions totaled $15,000. That means they spent just $18,000 on the plan. In doing so, they essentially cut their tax bill by more than half! That not only saved the couple money on their taxes, it also allowed them to help their employees begin making a plan for the future as well.
As with anything, each situation is unique. However, with the current Department of Labor rules in flux, it is important for business owners to meet with their financial planner and/or CPA for a 401(k) review, especially if you aren’t offering one at all. The savings could be unbelievable. So if your company offers a 401(k), SEP or SIMPLE plan, get with your team as soon as possible to see what benefits you could be missing. See how financial planning could benefit you and your business. Now is the time to review your planning to see if you’ll qualify for extra tax savings in 2017. You don’t want to wait until next year to plan for your taxes this year! This is certainly one of those situations where working with your CFP® and your CPA could save you thousands.
(For more from this author, see: Secure Your Financial Future With These Three Steps.)
Heritage Investors is an independent firm with securities offered through Summit Brokerage Services, Inc., Member FINRA, SIPC. Advisory services offered through Summit Financial Group, Inc., a Registered Investment Advisor. Neither Summitt Brokerage Services nor any of its representatives may give tax advice. Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. Although the opinions expressed are based upon assumptions believed to be reliable, there is no guarantee they will come to pass. The information may change at any time due to market or other conditions. Past performance is not an indication of future results.