As a business owner, planning for your retirement is essential. Implementing a retirement plan not only enhances your retirement savings but also strengthens your business. Retirement plans can be designed to maximize benefits for business owners and help the business grow. While you likely understand that a retirement plan boosts your savings toward your retirement goals, there are five key benefits you might not have considered.
Save for Your Retirement through a 401(k)
Business owners and employees under age 50 can make pre-tax (traditional) or post-tax (Roth) 401(k) contributions up to $23,000 in 2024, while those over age 50 can contribute $30,500. By offering a safe harbor 401(k), you, as the owner, and highly compensated employees can save up to the maximum each year. A safe harbor plan requires an employer match contribution, typically 3-5% of an employee’s pay. This allows you to avoid most compliance testing, saving time and money, while ensuring you can contribute the maximum amount.
Save Extra for Your Retirement with a Profit-Sharing Plan
For businesses with steady cash flow, a profit-sharing plan can be a strategic addition to a 401(k), allowing the owner to contribute additional funds and incentivize employees to align their interests with the company's success. Profit-sharing contributions are always made by the employer and can be designed to favor owners and certain groups of employees. These contributions are optional, so you contribute only when it makes sense for the business.
Save Even More for Your Retirement with a Cash Balance Plan
For owners seeking larger tax deductions, a cash balance plan can allow for significant tax savings if the business has a consistent surplus of cash flow. A cash balance plan allows you to save over $100,000 per year, significantly boosting your retirement savings and reducing your tax liability. This type of plan has higher costs due to annual testing and requires contributions for a specified number of years.
Attract and Retain Top Talent
It is no secret that employees today are seeking benefits beyond their paychecks. Younger generations understand the importance of saving early for retirement and expect their workplace to provide support. Offering a competitive retirement plan can help you find and reward a high-performing team. Vesting schedules can incentivize employees to stay with your company longer, as they must remain employed for a certain number of years to receive the full employer benefit. Additionally, plan options, such as immediate entry, auto-enrollment and financial education from a dedicated adviser can make your retirement plan stand out from the rest.
Potential Tax Credits
Small businesses implementing a new retirement plan may be eligible for several tax credits. Companies with under 100 employees who have not previously offered a retirement plan can receive a tax credit of up to $5,000 for the first three years to cover plan expenses. On top of that, plans that implement auto-enrollment can receive an additional $500 tax credit for the first three years. Speak with your CPA to learn more.
Offering a competitive retirement plan aids you in achieving your retirement goals and provides a benefit that employees value as a part of their compensation package. Various plans can be tailored to meet the needs of you, your business and your employees. Speaking with a retirement plan professional can help you navigate the options, understand the costs and benefits, and implement the best plan for your business.
This article was originally published on August 30, 2024 on TheStreet.
Haley Ellis, CFP®, CPFA® is a Financial Planner & Integrator at Allegiance Financial Group Advisory Services in Wilmington, NC. She is dedicated to financial empowerment, with a special focus on women and the next generation. Haley is passionate about motivating and guiding others to take control of their financial futures. She can be reached at haley@afgas.net.
As an advisory representative, Haley Ellis offers advisory services through Allegiance Financial Group Advisory Services, LLC (AFGAS). Securities offered through appropriately registered representatives of the Strategic Financial Alliance, Inc (SFA), member FINRA, SIPC. AFGAS is unaffiliated with SFA. Supervising office: 678.954.4000.
Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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