If you had a blank check to invest in your 401(k) each year in your retirement, how much would it be?
In 2021, $19,500 is the annual 401(k) contribution limit if you are under age 50, and $26,000 if you are over age 50.
If you are generous of heart with your employees, and or want to contribute more and receive a greater tax deduction, you can match 100% of the first 3% of employees compensation in a Safe Harbor ,non-elective contribution, and you automatically pass non-discrimination tests, while filling your 401k bucket.
A Safe harbor is a type of 401(k) plan with an employer match which avoids most annual compliance testing. Employer makes annual contributions on behalf of employees which automatically passes non-discrimination tests. There are two annual nondiscrimination tests a 401(k) sponsor must pass: The Actual Deferral Percentage (ADP) test and The Actual Contribution Percentage (ACP) test. The employer match is 100% of the first 3% of employees contributions.
Would you like to contribute more to your plan?
In order to contribute even more to your 401(k), the employer contributes 5% of employee compensation into a Profit Sharing Plan. Contributions to a Profit Sharing Plan is discretionary based on the quarterly or annual earnings of the company. As a result, your 401(k) plus a Profit Sharing contribution limit will total $58,000 under age 50 and $64,500 over 50.
Would you like to contribute even more to your plan?
Then consider a Cash Balance Plan.
With a Cash Balance Plan successful business owners can squeeze 20 years of retirement saving into 10, by maximizing contributions and tax deductions.
For example at age 60 a business owner can contribute as much as $266,000 pre-tax into a Cash Balance Plan. This doesn’t include your 401(k) and Profit Sharing contributions.
In order to achieve this high level of contribution, the IRS wants to make sure there is no favoritism towards highly compensated employees. As a result, to maximize your contribution you’ll probably end up contributing 7.5% to your partners and staff. Like all retirement plans, there are nuances.
Remember these numbers.
3% for 401(k)
5% for Profit Sharing
7.5% for Cash Balance Plan
Schedule a call with me, and I’m happy to help you Rock Out your plan sponsored plans.