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  • Jordan Cross

5 Ways Business Owners Can Optimize Retirement Savings

Updated: Jun 24


Key strategies that may help employers maximize savings and minimize taxes


As a business owner, you have the ability to pull certain levers that can increase retirement savings while controlling for tax consequences. By understanding how different qualified plans can deploy savings and tax strategies, you can optimize cash flow for your retirement future.


At CrossPlans we believe business owners currently have 4 strategic reasons for adopting a Qualified Retirement Plan:

  • Wealth Accumulation

  • Tax Deduction

  • Employee Retention

  • Alternative to Cal Savers

We want to spend time today focusing on the first two – namely how to use your Qualified Retirement Plan for Wealth Accumulation and Corporate Tax Deduction.


Maximize individual Contributions through 401(k) Contributions.

As the owner, you can defer up to $20,500 in salary in either a:

  • Pre-tax 401(k). Take the income tax deduction today and push the taxes to the future.

  • Roth contribution. Pay the taxes now. Then your account grows tax-free and when you access your account in retirement, it is also tax-free. Of course, the 401(k) plan would need to allow for Roth contributions.


For people over 50 years old, you can also add a “catch-up” contribution of $6,500 annually to your account.


To get these benefits, employers are required to make a contribution for their employees. A Safe Harbor 401(k) is a type of retirement plan that allows employers to max out their annual salary deferral. It is often required in the small and micro plan market to ensure you can optimize that contribution. Generally speaking, an Employer Safe Harbor contribution costs the employer between 3 – 4% of gross eligible salaries. From a tax planning perspective, employer contributions are deductible on your company’s federal income tax return.


For employers that want to max out their own 401(k) annual deferral, avoid certain plan design tests and provide an incentive for employees, a Safe Harbor 401(k) Plan may be right for you.


Optimize Corporate Contributions & Tax Deductions

For owners looking to save around $61,000 per year (or $67,500 if over 50), there is a 401(k) Plan that also utilizes Cross Tested / New Comparability functionality. This is a type of calculation method that combines the 401(k) and most often 3% Non-Elective Safe Harbor with a profit share.


What makes these plans unique is that business owners can select certain groups of employees to participate in the profit sharing portion of the plan, but the plan will need to be tested so that benefits do not discriminate in favor of highly compensated employees.[1] CrossPlans can work with you to design allocation groups of focused benefit groups to ensure you are passing the required allocation testing but generating tax efficient allocations.


Employers can set when and how much to contribute to these plans, which can be changed annually. Contributions limits are the lesser of 100% of compensation or $61,000 for 2022 (and $67,500 if over 50 years old).[2] Advanced plan design is necessary and these plans typically cost more to administer.


Profit Sharing contributions are flexible year to year and are often subject to a vesting schedule of up to 6 years using a graded vesting schedule.


Roth Conversions

Roth Conversions are possible if having the ability to adjust your taxable income is something that sounds interesting, then this plan option may be worth exploring.


While not all Plans designed by CrossPlans allow In-Plan Roth Conversions, our Plan Document can support that provision and we can review and advise on an individual Plan by Plan basis.


With respect to 401(k) plans, a Roth Conversion is the transfer of funds from your traditional pre-tax 401(k) into a Roth 401(k). Account owners pay tax on the money they convert and then are eligible to make tax-free withdrawals from the account in the future. From a tax planning perspective, this approach requires taxes to be paid up-front versus when you retire. This can be helpful if you expect to be in a higher tax bracket at retirement.


From an estate planning perspective, Roth IRAs are also not subject to required minimum distributions.[3]


While CrossPlans cannot give specific tax advice for whether or not an In-Plan Roth Conversion Strategy is appropriate for your personal situation, we are happy to discuss the mechanics and help you position the conversation with your Financial Advisor and CPA.


Cash Balance Defined Benefit Plans Allow for $200,000 in Retirement Savings

Looking for large tax deductions and rapid retirement plan savings? A Cash Balance plan may be an option. The pre-tax account is an above-the-line tax deduction.


Cash Balance plans are best for owners that:

  • Have a steady and consistent revenue that projects at least 3-5 years into the future

  • Already contribute 5% or more towards employee retirement benefits through a Safe Harbor and Profit Sharing Plan

  • Are comfortable with advanced plan design requiring regular and recurring annual contributions

CrossPlans currently works with nearly 150 businesses on their Defined Benefit and Cash Balance Plans and would be happy to schedule a time to review and discuss how adding a Defined Benefit Plan may help you accelerate your Wealth Accumulation and Tax Deduction.


Triple Tax Savings may be an option Away from your Qualified Retirement Plan(s)

For employers that offer a high-deductible health plan, you can also setup a Health Savings Account (HSA). These accounts are funded with pre-tax dollars, the account grows tax-free and the money is income tax-free (when it is spent on qualifying medical expenses).


For 2022, the HSA limit for is $7,300 for families and $3,650 for individuals. Also, HSA dollars can be invested in the stock market, which means they could grow over time. Therefore, if you start saving through your HSA as part of a retirement planning strategy, you could have access to another bucket of tax-free money for medical expenses. When the average American’s health care costs are $300,000, wouldn’t it be nice if the money was triple tax-free?[4]


While CrossPlans does not administer nor consult on HSA Plans we are increasingly seeing these plans deployed not only for Wealth Accumulation and Tax Deduction but as a valuable employee recruitment, retention.


Worth a Conversation

With so many different retirement savings options available for business owners, it’s important to work with a qualified financial advisor. We can help you set up the right plan(s), discuss tax planning strategies and help you find the best option that seeks to optimize retirement savings.


CrossPlans

23041 Avenida de la Carlota

Suite 300

Laguna Hills, CA 92653

714.210.4164

949.387.0611 Fax

info@crossplans.com


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[1] Internal Revenue Service. “Choosing a Retirement Plan: Profit-Sharing.” 2022. [2] Internal Revenue Service. “Choosing a Retirement Plan: Profit-Sharing.” 2022. [3] Kagan, Julia. “Roth IRA Conversion.” Investopedia. March 5, 2022. [4] “How to plan for rising health care costs.” Fidelity. 31 Aug 2021.