On this week's episode, Casey Smith talks with Jordan Sute, CPA and Matthews Barnett, CFP®, ChFC®, CLU® to discuss maximizing tax savings for employees and business owners. They go over 401(k) plans, Roth IRAs, and other company retirement accounts.
A 401(k) plan is an employee-sponsored retirement plan that comes with an administrator (such as Fidelity, Schwab, or TD Ameritrade) and a custodian. Once you open up this account, you can put money into it to save for your future. You cannot have access to it (without penalties) until you are age 59 1/2 and you can contribute up to $19,500 per year. If you are over the age of 60, you can add another $6,500 into the account per year.
Pre-tax means that every dollar you are contributing to the account is not being taxed. Then, once you pull the money out in retirement you are taxed based on whatever tax bracket you find yourself in during retirement. The other option is a Roth account. In this account, the money is taxed like the rest of your income and grows tax-free once you contribute. Once you pull the money out, you don’t pay any income tax on it.
This plan is separate from your 401(k) plan. These are written for each specific company. At the time you put the money in, you have to decide how you will pull it out. A risk with a deferred compensation plan is that if the company merges with another, the plan has to liquidate. This can potentially put you in a high tax situation. Another risk is that if the company goes out of business, the money stays with the company and not with you. From a W-2 perspective, you will pay income taxes on all of your payroll, but not federal taxes for that year if you choose to defer.
These HSA accounts have triple taxation benefits. You get a deduction to contributions upfront, the funds grow tax-free, and they are withdrawn tax-free when used for qualified medical expenses.
Some options are to do a Traditional IRA or a Roth IRA. Money goes into an IRA pretax and money goes into a Roth taxed, but grows tax-free. You could also simply contribute to a brokerage account. Annuities are not a great option in most cases. The idea is that you want to have access to low-cost index funds.
If you are self-employed and looking to save a lot, you should consider a solo 401(k). It’s opened similar to a traditional 401(k). These are cost-efficient and easy to open. The catch is that you have to be the only employee (unless you have a spouse). After you hire your first employee, you have to move to a traditional 401(k).
If employees decide to not participate in the 401(k), you may not be able to contribute to the maximum for yourself. A safe harbor plan means that you are committing to contribute 4-6%. So if only a few people contribute, you can still match at those percentages.
This stands for a Self Employed Pension. If you have a W-2 job and then also a side business, you can contribute to a SEP with your side business and the 401(k) at your W-2 job.
2:42 The Basics
3:39 Pre-Tax vs Roth
6:59 Deferred Comp Plans
9:41 Health Savings Account (HSA)
10:57 What if I don't have access to a 401(k)?
13:52 Solo 401(k)
19:26 For the Employer: Safe Harbor Plan
26:15 SEP IRA Plan
Learn more about Brad Lyons.
Learn more about Matthews Barnett.