By Tom Zgainer
Regular maintenance regarding our health, be it a twice a year teeth cleaning or an annual physical, allows the experts to determine if we are as fit as we think we are, or see if there might be some issues under the hood that need attention. Likewise, each April, we are reminded of whether our tax planning is sufficient or perhaps needs a tune-up. Similarly, your retirement plan strategy is worth reviewing with a pension plan expert as well.
Often the original plan and strategy you implemented get away from your intended individual and corporate goals. Your employee populace may experience turnover, the actual age demographics of your staff may take on a different makeup, and by the way, you are now a year closer to retirement. You can find these changes limit your personal contributions due to required employer contributions or, more positively, open up new opportunities to design a plan that accelerates your personal contributions.
Retirement plans — whether a 401(k), profit-sharing plan, a defined benefit, or a cash balance plan — all require some give-and-take. For owners, principals, key associates, or partners to take advantage of the opportunity to maximize annual contributions, you’ll need to give a proportional amount that passes all the required compliance tests to eligible employees.
These employer contributions at first might not be palatable to you and your bottom line. However, utilizing a long vesting schedule — for example up to 6 years — can help ensure an employee needs to stay and contribute to your practice that long to earn any 1 year’s contribution. Plus, you receive the tax deduction benefit of the full amount of employer contributions in the tax year of the contribution, up to 25% of gross payroll.
A great reason to go through an annual plan design checkup is to see if there is a better plan type option for you. As you get closer to retirement, generally over age 45, plan types, such as a new comparability profit-sharing plan, a cash balance or defined benefit plan, can be paired with a 401(k) to rapidly accelerate your personal contribution objectives.
For 2018, you can defer $18,500 into a 401(k) plan, with a $6,000 catch-up provision if over age 50. That’s generally the best first thing to try and accomplish. If your plan demographics are suitable, meaning staff is younger than the owners, principals, or partners (HCEs), and you are over age 45, a new comparability profit-sharing plan can provide a maximum benefit for a select employee group, while providing the lowest possible contribution to non-key groups allowed by law. This plan design can help you add to your deferrals and get up to the $55,000/$60,000 maximum annual limits from combined employee and employer contributions.
To really accelerate your contributions, consider looking into adding a cash balance or defined benefit plan to the 401(k). Maximum contributions for these plans range from $110,000 at age 45 to over $260,000 at age 62. When added to the 401(k)/profit-sharing contributions, it’s like squeezing 20 years of retirement saving into 10, not to mention the significant reduction to your tax liability that you will enjoy.
Just as you might make an appointment with your physician or CPA, this is a great time of year to get a retirement plan checkup as well. It’s easy and painless, as a census with your current firm demographics will enable a experienced pension specialist or actuary help determine if there is a better way to proceed into the years ahead for your retirement planning.
Tom Zgainer is CEO of America’s Best 401(k).