Maximize Tax Savings and Wealth with Strategic Retirement Plan Stacking

As a successful business owner, you're likely familiar with the challenges of managing wealth, particularly when it comes to minimizing your tax burden. One of the most effective strategies involves the savvy use of retirement plans. You may already have a 401k or a Safe Harbor plan in place, but are you making the most of these tools? The answer lies in stacking your retirement plans - combining your 401k with a Safe Harbor provision, Profit-Sharing, and a Defined Benefit/Cash Balance Plan. Here's why this strategy could be a game-changer for you and your business.

Why Choose This Combination?

The primary reason to choose this combination of plans is to save significantly more for retirement on a tax-deferred basis than you could with a traditional 401k alone. The 401k plan, when combined with a Safe Harbor provision, allows for contributions from both employer and employee.

Adding a Profit-Sharing component allows you to make discretionary contributions to your employees' retirement savings based on your company's profitability. This feature is especially beneficial during prosperous years as it enables you to put away more money tax-deferred.

The Defined Benefit/Cash Balance Plan is the ultimate tool in this combination. Unlike a 401k, which has a capped contribution limit, a Defined Benefit/Cash Balance Plan allows for much larger contributions, which can be especially beneficial for high earners. These contributions are also tax-deductible, providing immediate tax relief.

Setting Up and Calculating Contributions

Setting up these plans requires the expertise of a highly specialized third-party administrator. They will work with you to establish a plan that meets your specific business and personal financial goals.

The 401k and Safe Harbor contributions are subject to maximum limits set by the IRS. Profit-sharing contributions are discretionary and can vary from year to year. The Defined Benefit/Cash Balance Plan contributions are determined based on several factors, including your age, income, and years until retirement. The older you are and the closer you are to retirement, the larger your contribution can be.

Is This Strategy Right for You?

This strategy is most beneficial for business owners with consistent, substantial profits who can commit to making substantial contributions for a number of years. It's also beneficial for those close to retirement who want to rapidly increase their retirement savings.

Offsetting Your Current Tax Burden

Each of these plans offers tax-deductible contributions, which can significantly offset your current tax burden. Essentially, every dollar you contribute to these plans reduces your taxable income by a dollar, lowering your overall tax liability.

Why This Combination Is an Effective Tax Strategy

One common misconception is that stacking retirement plans merely "kicks the can down the road" by deferring taxes until retirement. However, this perspective overlooks several key benefits of this tax strategy.

Firstly, by deferring tax payment, you're effectively leveraging the time value of money. This means your wealth can grow unencumbered by taxes, which can lead to significantly greater accumulation of assets over the long term.

Moreover, it's important to remember that during retirement, you're likely to be in a lower tax bracket than during your highest earning years. This means that when you eventually withdraw from these plans in retirement, the amount of tax you pay will generally be lower than what you would have paid if you were taxed during your peak earning years.

Additionally, these retirement plans provide an element of control over your taxable income in retirement. By carefully planning your withdrawals from these plans in conjunction with other income sources, such as dividends, interest, and capital gains, you can manage your tax liability each year. This level of flexibility is not available if the tax is paid upfront during your working years.

Stacking retirement plans is not just about deferring taxes; it's about leveraging your wealth growth, optimizing your tax situation, and maintaining control over your financial future. It's a strategic move that helps you navigate the tax landscape efficiently and effectively.

A Golden Handcuff to Retain Top Talent

This combination of plans is not only beneficial for you, but it can also be an effective tool to retain your top employees. The Profit-Sharing component of this strategy can be structured to favor key employees, providing them with a substantial retirement benefit. This can be a more cost-effective way to reward these employees than offering high bonuses, which incur payroll taxes.

How Much Can You Put Away?

With this combination of plans, you have the potential to save a substantial amount each year on a tax-deferred basis. For example, if you're 50 years old, in 2023 you could contribute $26,000 to your 401k, $38,500 to your Profit-Sharing plan, and potentially over $300,000 to your Defined Benefit/Cash Balance Plan. Additionally, if your spouse is also an employee, they may have their own separate contribution limits, further increasing the total amount that can be saved within your household. As always, individual circumstances can greatly affect these figures, so it's important to consult with a financial advisor or tax professional for specific guidance.

The Advantage Over a Traditional Safe Harbor 401k Plan

While a Safe Harbor 401k plan allows for employer and employee contributions, it doesn't offer the level of tax-deferred savings or the potential for large profit-sharing contributions that this combination does. The addition of the Defined Benefit/Cash Balance Plan is the key difference, providing an opportunity for much larger, tax-deductible contributions.

In conclusion, stacking retirement plans can significantly increase your retirement savings, reduce your current tax burden, and serve as a powerful tool to retain your top employees. It's a strategy that requires careful planning and expert advice, but the potential benefits are substantial.

Ascent Wealth Strategies provides strategies for financial/estate and/or tax planning. These strategies do not constitute tax or legal advise. Consult legal or tax professionals for specific information regarding your individual situation.

Clear Creek Financial Management, LLC dba Ascent Wealth Strategies is a Registered Investment Advisor. This case study is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Clear Creek Financial Management, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Clear Creek Financial Management, LLC unless a service agreement is in place.