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Save More for Retirement with the Right Company Programs and Savings Individuals Can Control
By Andrew D. Cohn, AIF®
It’s almost Tax Time! Whether you have completed your income tax return or are just getting started, you probably are looking for ways to keep more of your hard-earned money. We do not give tax preparation advice, but we can offer a few suggestions for ways in which corporate retirement plan design and individual actions can affect savings for employers and employees.
Business owners maximize savings with a defined benefit plan. In a defined contribution plan, such as a 401(k) or 403(b), the employee decides on the amount of pretax contribution to the plan and the investment strategy for the account; the company might or might not make an employer match. When the employee retires, he or she gets whatever money is in the account. In a defined benefit plan, though, the benefit is predetermined. For profitable privately owned or small businesses, these plans can make a huge difference for the owners.
If you are a business owner, you can set up a defined benefit plan for employees in which you also can participate. If the plan meets IRS requirements, you as the employer could be able to contribute up to $275,000 in pretax income into the plan in 2019. With the new tax laws, this deduction can make a huge difference in your tax bill.
Anyone with earned income can contribute to a traditional IRA. Even if you are covered by an employer plan, you can make a pretax contribution to an Individual Retirement Account (IRA) of up to $5,500 before April 15, 2019 for the 2018 tax year; if you are 50 or older, you can make an additional catch-up contribution of $1,000. For the 2019 tax year, the maximum contribution is $6,000, with a catch-up contribution of $1,000.
Do you have a Roth IRA? You may prefer to make a contribution to a Roth IRA. With a Roth IRA, your contribution is after-tax money but you do not pay taxes on the money when you withdraw it in retirement, and you do not have to start taking a minimum distribution when you reach age 70½. Higher income earners may not have the Roth option available. The 2018 income general limits for making a contribution to a stand-alone Roth IRA are $122,000 for a single filer and $193,000 if you are married and file jointly. That increases to $137,000 and $203,000 for 2019.
Even if your income exceeds the limits, though, you may be able to contribute to a Roth, though not as an IRA. Well-designed company plans include a Roth option. Does your employer include this option in your employer plan? If you are an employer, you might want to look into adding a Roth option; if you are an employee, you might want to ask your employer about it.
You also might be able to sidestep the Roth IRA income limits with a "back-door" Roth IRA, in which you make a non-deductible contribution to a traditional IRA and then soon after convert it to a Roth.
Don’t let student loan payments stand in the way of saving for retirement. As most employers and virtually all Millennials know, high student loan payments can keep young people from saving for retirement. However, the IRS has issued a Private Letter Ruling that allows certain plan designs to count an employee’s student loan repayments as a contribution to the employer-sponsored retirement plan for the purpose of receiving the employer matching contribution. If the company provides this option, and the appropriate student loan payment tracking takes place, the employee may become eligible for an employer match. Offering this as an option could help younger employees get started earlier on retirement saving, and it also could help employers attract and retain younger workers.
At The Bensman Group, we are experienced at helping employers understand the advantages and disadvantages of different kinds of employee retirement plans, and can help create a plan that works for employers and employees. If you are interested in exploring these or any other options – or any wealth or risk management issue – we would be happy to talk to you. You can contact us at 847-572-0813 or firstname.lastname@example.org.