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Retirement Savings and Tax Planning as a Small Business Owner (VIDEO) Thumbnail

Retirement Savings and Tax Planning as a Small Business Owner (VIDEO)

Planning for Retirement Tax Planning Business Owner Planning

The costs and benefits of providing a retirement plan for yourself and your employees as a small business owner. In this video, we cover how to reduce taxes and save for retirement as a business owner. Join Wayne and Clayton from Squire Wealth Advisors as they discuss.


Clayton: Hi, I'm Clayton from Squire Wealth Advisors and with me today I have Wayne Barben, who is a partner at Squire and the head of our department at Squire Wealth Advisors. Wayne has a wealth of knowledge, particularly in advising on employer-sponsored retirement plans, and we run into a lot of business owners who are really worried about big tax bills and want to prepare to retire from their business one day. So I thought it would be really good to bring in Wayne and just have a conversation about retirement plans and how they can be a great solution to that problem that a lot of our business owners face. So Wayne, thanks for joining us.

Wayne: Happy to be here! Looking forward to it.

Clayton: For those who may be unfamiliar, what is an employer-sponsored retirement plan, and what different kinds are there?

Wayne: So unlike, say, an IRA or anything like that, that any individual can go and set up and then contribute to -- IRA or Roth IRA -- a company-sponsored plan is actually created by the company. So for example, Squire creates a 401(k) plan for our employees to participate in. It allows the employees then to contribute, and the company matches. So it's company-sponsored. They're the ones that put it together, just for the ease of having a retirement plan for their employees. There are a number of different types. The two main categories are defined contribution and defined benefit. A defined contribution plan is a type of plan where the employer contributes to a certain limit. A defined benefit plan is a plan where they're trying to get a certain amount into a balance to provide a benefit for someone's retirement years. So that's what that is.

Types of defined contribution plans include 401(k) plans and profit-sharing plans (sometimes those two are combined). There are other types we don't see as often with hospitals and educational facilities, things like that. We won't get into that today. On the defined benefit side there are your typical pension plans, that's a type of defined benfit plan, and then cash balance plans. That's typically what we see. There are a few others out there but that's typically where people go. Probably the backbone of all of those is 401(k) plans. Most companies, if they're setting up a retirement plan that's what they're looking for, is a 401(k) plan.

Clayton: Yeah, that's great. Probably with even our own clients, most of the time it's 401(k)s that we're dealing with. They seem to be the most flexible, they work the best with most situations.

Wayne: Yeah, they work really well. You can combine them with a profit-sharing plan, they're fairly inexpensive in their operation, and in the amount that the employer needs to contribute for the employees. They don't have the real high limits as far as the tax savings and the amount of contributions that can be made to, say, a cash balance plan, but for your typical employer with a number of employees, 401(k) plans work tremendously well.

Clayton: So, Wayne, I think the big thing we get a lot -- and one of the main reasons people set these up in the first place -- a small business owner comes in the door, either they have employees or they don't, maybe they have a few, or maybe they have a lot, right? And they say 'it was a really good year, and we are hammered. We are totally worried about taxes this year. It's going to be astronomical, the amount we're paying in taxes.' And one of our recommendations often is, have you considered a 401(k) or a cash balance plan. Can you talk a little bit about why these plans help business owners reduce their taxes?

Wayne: Sure. So anytime you make - One of my favorite things about what I do is - When you want a tax deduction you usually have to spend a dollar to save 30 cents. Whereas with a retirement plan, the benefit there is you have to move the dollar over into an account to be saved for your retirement, but it's still your money. And you save the 30 cents or whatever tax bracket you're in. So you haven't lost it like a lot of other types of expenses. It gives somebody the ability to set some money aside for retirement and save taxes on those dollars. Later on you'll pay taxes when you withdraw it, but for most people, in retirement they're in a lower tax bracket so it works out better for them anyway. They combine that with, say, their social security. They have that supplement to their social security, some additional funds that they can live on, but they've saved more in taxes along the way than they pay in the end. Typically. We won't get into the weeds on that, but that's really the basics of why they're set up to begin with.

Clayton: That's great. I mean, that's what I love about it too, is you can have your cake and eat it too.

Wayne: Yeah, absolutely. Absolutely.

Clayton: So, who doesn't want to save and get a tax break for it?

Wayne: Yeah, it's just the same as if you bought a bunch of supplies or, you know, something like that, that you need for your business, but it's an expense, right? Once the money is spent then it's gone, whereas in this case the money isn't really spent, it's just set aside in a retirement account where it's saved for your retirement, hopefully invested and it grows and turns into a significant amount for you to have a real nest egg when you get to that point in retirement.

Clayton: That's great. So, Wayne, can you talk a little bit about cash balance plans, and what type of a business owner might benefit most from them? Because they're not a solution that's going to make sense for everybody, but there are some that can really do incredible things with them.

Wayne: Yeah, I have seen them just have tremendous amounts of tax savings for somebody. It's typically somebody in a high tax bracket, so if they have high earnings. This typically works well for a lot of the professionals out there - attorneys, doctors, dentists - but I've seen it also with sales, right? If you have a small group of employees, and specifically if you have owners that are a little older than their rank-and-file employees. And the reason for that is a cash balance plan is a type of plan where you're trying to create a sum of money to be used then for someone's retirement. So if you're closer to retirement, a lot more dollars could go in for, say, the owner, than needs to go in for the average of the other employees. So it's a great way to get past the limits. For example, a 401(k) plan has a limit. Even if you're over 50 like I am, your limit is $30,000 a year that you can contribute, maybe plus the matching contribution that a company might put in as well. But with a cash balance plan, I've seen them where even with a few employees they can put in 2, 3, $400,000. And it all depends on how much they need to replace their compensation that they're earning in retirement, and how many years they have to get that money in there. So you can really put a lot of money if you have some high-earning years and you're maybe a little bit behind on your retirement savings, it's a great way to put that money in, save on the taxes, and then have a plan where down the road you can use that money in your retirement. So they're really great for some real heavy lifting, so to speak, in your retirement funding toward the end of your career, is where I probably see them most useful.

Clayton: I like that. Just to add a point to that, I mean, we see it a lot with these professionals because they make good money and they're maxing out their 401(k)s and they're asking 'what more can I do? $22,500 isn't enough.' I've seen people put $200,000 -$300,000 combined into these plans and all of that is deductible to the business. So it's like buying a $200,000 F-150 but better, because it's going toward retirement! So these can be really cool.

Wayne: Yeah, they're a great option.

Clayton: So last question, Wayne, I think a lot of people, when they hear about 401(k) plans, they think they're cost-prohibitive. They think 'oh, it's going to cost so much to do it.' But what we're finding, especially now with Secure Act 2.0, setting up these plans is not that cost prohibitive. In fact, it's basically free for the first 3 years, with the tax credit.

Wayne: Yeah, they're some really good, new legislation as part of the Secure Act to encourage people to set up 401(k) plans, to give that option to their employees, even small businesses, wherein the IRS will give tax credits that will replace a lot of the income or the dollars that were spent or even put into the plan for that employee, and you'll get a tax credit for it on the other end. So we'd love to meet with anybody and show them what that looks like, and see if that really turns the dial a little bit to get them to put together a 401(k) plan for their employees. It's made that much more inexpensive, that much more beneficial, to have one. It's a little crazy for those of us who have been involved with the tax world too for a long time to see this just kinda given away so that you can have that incentive to set up a 401(k) plan. But take advantage of it while we have it!

Clayton: Well Wayne, thanks for joining me here and talking about retirement plans and all that. Thank you!

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