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How a Properly Planned 401k Can Lower Your Taxes

should i use a roth or traditional

If you participate in a qualified 401k plan, you’re among millions of Americans utilizing this option for retirement planning. These plans are a great way to sock away pre-tax dollars to fund your future lifestyle once you retire. A properly planned 401k can also represent an excellent benefit for a business owner as well. Here’s how.

The Scenario

We recently met with small business clients, along with their CPA. This particular client generates around two-and-a-half million dollars in gross revenue a year. The owners, a husband and wife team, each earn $75,000 a year in W-2 wages, and the business saw a profit of just over $297,000, which is split 50/50 between them. They’re frugal with their money, carrying no debt and spending roughly $6,000 a month on living expenses. This has been the key to their success.

The Before and After

They’re making almost $450,000 a year in taxable income. Before they incorporated 401k planning into their business model, it wasn’t unusual for them to get tax bills ranging from $150,000 to $180,000 a year. Now, with their 401k plan in place, their combined tax bill was $63,000. We placed $106,000 of their income into the plan. Utilizing employee contributions, safe harbor contributions, and profit sharing contributions, we amassed huge savings for these business owners. The cost of implementing this 401k plan? Just $3,000. Their employee contributions combined with the employee portion of the profit sharing contributions totaled $15,000. So for just $18,000 in costs to them, we essentially cut their tax bill by more than half. In doing this, the couple not only saved money on their taxes and provided for a better personal retirement, but they have also encouraged their employees to begin planning for their own futures as well.

As with anything, each situation is unique; however, with the current Department of Labor rules in flux, one of the actions we’re taking at Heritage Investors to help business owners in our East Tennessee community is offering a COMPLIMENTARY 401(k) review. So if your company offers a 401(k), SEP, or SIMPLE plan, we would like to help you. If you’d like to see how comprehensive tax planning could benefit you and your business, give us a call. Now is the perfect time to review your future plans to see if you could qualify for extra tax savings in 2017. With proper planning, we may be able to create some added tax deductions for 2017. This is certainly one of those situations where working with your CFP® and your CPA could save you thousands of dollars.

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