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

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.