Many business owners are so busy running their company that they do not have the time to focus on their personal finances. It is a lost opportunity to legally lower one’s tax burden using viable tax deductions created for retirement, particularly if the business is growing. Forbes recently cited two main areas of opportunity.
401(k) profit-sharing plans
Business owners have the opportunity to max out their 401(k) by, for example, paying $58,000. Those over 50 years old can also pay an additional catch-up contribution of $6,500 for a total of $64,500. This can then be doubled by doing the same for the spouse, for a $129,000 tax break. It is a substantial amount for a single year and is a real game-changer when executed for a decade or more.
A cash balance plan
A cash balance or defined benefit plan is another viable option for lower a business owner’s tax burden. This plan involves moving to a 401(k) and using the catch-up option. They could also use a cash balance plan, for example, placing an additional $100,000 for a total of $164,000 in tax deductions. While this strategy involves saving significant amounts of money rather than spending it, it is important to remember that purchases are taxed, so socking it away can seriously jump-start the retirement savings.
Time well spent
These arrangements take time to set up, but nowhere near the amount of time to generate at work the additional income these plans save. They are also clearly allowed under current tax laws, which means fewer chances of a dispute with the IRS or the state. Those with questions about their tax burden and questionable advice from a financial advisor can get clear answers from an attorney who understands federal and state tax laws and how they apply to the needs of small business owners.