January 25, 2022

Acqua NYC

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You May Be Able To Put More Money In Your 401(k) Than You Think

Co-founder and CEO of PAX Financial Group, LLC. Guiding the transition into retirement. 

In 2020, 401(k) limits increased to $19,500. If you are over 50, you can make a catch-up contribution of $6,500. The sum of these amounts allows you to save $26,000 per year in your 401(k). However, if you are a business owner, you can creatively build your wealth above and beyond the $26,000 limit. First, let me tell you why you should hustle now to find a strategy to squirrel away more 401 (k) money.

The Importance Of A 401(k) Strategy

If you are over 50, you may only have ten to fifteen years to save for retirement. Once your income stops, you aren’t allowed to put money away with the same beneficial treatment. Every single year counts, so don’t miss a year without attempting to maximize your 401(k).

As an additional consideration, many pundits feel that tax rates may go up. Even if they don’t go up in your bracket, the government can increase your tax bill through changes in exemptions and deductions. In my retirement planning experience, your 401(k) plan is one of the cleanest ways to reduce your tax bill.

Even if you have a vision of cashing in on your business equity for retirement, you don’t know what the future holds. Suppose you are a hardware store owner in a small Texas town and have done everything right. People love you. Your products are priced right. You are an expert in inventory management. As you inch toward retirement, you set your sights on potential buyers. However, what you didn’t anticipate was Home Depot setting up a shop right down the road. All of a sudden, the value of your goodwill took a significant hit. In this situation, you will be thankful that you hedged your bets and socked money away in your 401(k) year after year. 

Maximizing Your 401(k)

For a business owner, one creative way to maximize your 401(k) is to change the way you give matching funds to your employees. Consider sitting down with your plan administrator and asking about safe harbor contribution options. With a safe harbor, you may have to put more money into the plan for employees.

For example, one safe harbor option requires you to put in 3% for every employee regardless of whether that employee contributes or not. This approach may be an additional company cost when compared to a matching program. However, by making this adjustment, you will (as a business owner) be allowed to maximize your personal contribution without fear of an annual refund because you failed the IRS nondiscrimination testing.

Wouldn’t it be nice if you could find a way to put the maximum yearly contribution limit (IRC section 415(c)) of $64,400, including catch-up? That maximum contribution amount would hedge your business risk, reduce your taxable income and hopefully grow to become a nice nest egg when you transition into retirement. 

The above approach is just a sample of potential 401(k) options. Have a conversation with your plan administrator or your financial advisor. They will need to crunch the numbers and help you evaluate the cost and benefits. I’m confident that you will find solutions to help you retire well through a healthy evaluation of your 401(k) plan. 

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.


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