5 Tax Tips for Business Owners- Tip 5- Implement a 401k and Cash Balance Plan

In this discussion with Matt Blocki from EWA, the focus is on providing five tax tips for business owners to maximize tax efficiency. These tips encompass various strategies to optimize your tax situation:

  1. Choose the Right Retirement Plan: Selecting the appropriate retirement plan for your business is crucial. A 401(k) plan is recommended as it allows substantial contributions, with a 2022 limit of $20,500 for those under 50. This can be made on a Roth or pretax basis. Additionally, a match or profit-sharing contribution of $40,500 is possible, resulting in a total annual contribution of up to $61,000, which may be tax-deductible.
  2. Consider Catch-Up Contributions: If you’re over 50, you can make an extra catch-up contribution of $6,500 to your 401(k), further enhancing your retirement savings.
  3. Navigate Employee Considerations: If you have employees, ensure your 401(k) plan meets requirements such as safe harbor matches and nondiscrimination testing to avoid favoring highly compensated individuals. This may involve hiring a third-party administrator to conduct the necessary annual testing, incurring additional costs.
  4. Explore Cash Balance Pension Plans: For highly profitable businesses in higher tax brackets, a cash balance pension plan offers an attractive option. This plan operates on a pretax basis, and its contribution limits are significantly higher than traditional retirement plans.
  5. Retain Key Employees: Implement vesting schedules and other benefits within your retirement plans to retain valuable employees.

These tips can help business owners optimize their tax planning strategies. For further guidance or questions, it’s advisable to consult with a tax professional.

Video Transcript

Hi, Matt Blocki with EWA. Today we are talking about five tax tips if you’re a business owner. So as a business owner, I’m sure you’re aware you pay your fair share in taxes. And as a business owner, there are ways to be as tax efficient as possible.

So we’re going to be talking about some common tips and tactics and then also some things that you may have not heard about. The last tip we have is a simple one, hopefully an obvious one is doing a retirement plan, but doing the correct retirement plan for your business.

Typically, if it makes sense, we recommend do a allows you to put a lot more into your retirement plan than something like a simple IRA would, where there’s lower contribution levels and lower caps. But in a 401K entering the 2022 tax year if you’re under the age of 50.

So 50 years or less, 20,500 is what’s called your 402 G limit. That can be done. Roth or pretax basis, and then 40,500 is the match or profit sharing contribution. So these two together you can put up to 61,000 per year into a 401 that could all be tax deductible if you decide to make it all pretax.

And then if you’re over 50, you can put an additional 6500 as a catch up contribution in as well. So obviously a high amount of money that can be put in partially. Roth partially or all pretax if you’d like it to be very tax efficient, asset protected, there’s many other benefits.

The only downside of the get the max them. If you’re a single employed group where it’s just you, then it’s very easy. But if you have lots of employees, you do need to contribute either a safe harbor match, you need to make sure that 401K meets certain kinds of requirements, or testing to make sure that just the highly compensated people are not getting favored.

IRS has several different tests that will allow for the plan to pass its test that needs to be done on a year to year basis. And because of that, a third party administrator needs to be hired to test the plan.

That can usually be between a cost of like seven hundred dollars to one thousand dollars per year to administer that test. So huge benefits. There’s also the added cost of the third party administrator and formulating.

This can also be a way to retain your key employees by having a vesting schedule on the then once a 401K is maxed out, you can also do what’s called a cash balance pension plan. And this is kind of a hybrid between a defined benefit plan and defined contribution plan.

But because of the design, this is all done on a pretax basis. Some calculations need to be done on how much can be done for you versus your employees. But the limits of this let’s say if you’re in your late 40s, early fifty s, or almost double what you could put in a you can actually have both of these plans.

So you can max out a max out a cash balance plan if your business is very profitable and in a high tax bracket. These are our five tips for tax planning. Please reach out if you have any questions.

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5 Tax Tips for Business Owners

5 Tax Tips for Business Owners- Tip 1- Section 179 - Accelerated Write Off for Vehicle
5 Tax Tips for Business Owners- Tip 2- Use the Augusta Rule
5 Tax Tips for Business Owners- Tip 3- Use S Corp Election to Lower Salary
5 Tax Tips for Business Owners- Tip 4- Hire Your Children

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