The bread and butter income tax deferral tool for many small business owners is the profit sharing plan.
A Profit Sharing Plan is a qualified retirement plan where the annual contribution limits are 25% of pay or $53,000 in 2015 and $53,000 in 2016.
Combined 401(k)/Profit Sharing Plan
A combined 401(k)/Profit Sharing Plan allows an employee/owner to “max out” the pension plan contributions; although, it is very painful to “max out” due to the amount of money required for the employees to be funded.
In order to limit the pain of funding a PSP for a company’s employees, certain testing options are used to skew the contributions in favor of highly compensated employees (usually the business owners).
Profit Sharing Plans
The following are the main options a business has to test its qualified plan and skew the numbers in favor of key employees:
- “Integration” with Social Security
- Age-Weighting the Contribution
- New Comparability Classification Plans
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Defined Benefit Plans
Generally, a Defined Benefit Plan allows for much bigger deductions for employees who are getting a late start on their retirement planning.
Roth 401(k) Plans
A component of a “regular” 401(k) Plan; however, the funding of a “Roth” 401(k) Plan is with AFTER-TAX dollars.
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Years Go By
Planing for retirement is a bit like planning a vacation with one big difference. You generally only get one shot at getting is right.
Take the time to plan now, it will pay large dividends later in life and for future generations.