Dispatch #75 - There’s Still Time: Max Out Your Retirement Plan
Getting back to basics this week…
The construction industry is known for its volatility even without a pandemic. So, it’s good to know there’s still a safe, sure-fire way to build wealth for you and your family: Max out your retirement plan.
This best practice builds wealth in four ways:
The most obvious, of course, is that you save money for tomorrow instead of spending it today.
You pay less in income taxes.
If invested wisely, your retirement money will grow over time.
In some cases, a retirement plan can protect your nest egg from creditors in the case of bankruptcy or other claims situations. So, you are moving money from a high-risk situation (your business) to a low-risk situation (prudently invested personal 401K funds).
Max out this year’s contribution
Have the accounting department increase your paycheck retirement withholding to max out this year's contributions by the end of December. Doing this will ensure that you get the biggest possible tax deduction.
401K limits - $19,500 ($26,000 w/ age-50-and-older “catch-up”) plus your company’s matching contribution
SIMPLE IRA - $13,500 ($16,000 w/catch-up) plus your company’s matching contribution
Not in a financial position to max out your plan? No problem. Contribute what you can by putting aside a little each year. Every dollar counts.
Discretionary Profit-Sharing Plans
Most 401K plans have a discretionary profit-sharing component in which the company can contribute an extra amount (above and beyond any required safe harbor match) into every eligible employee’s retirement account.
Ask your 401K third-party administrator and CPA to analyze whether this makes sense. It usually comes down to a balance of putting more money into the owners’ retirement accounts, the employee retention impact of this additional benefit, and the after-tax cost of the above.
Keep Your Money Growing
It’s common for contractors to fund plans when business is good, then pull out money when cash is short. Don’t. Leave the money in the plan, no matter what. Taking distributions before you retire triggers additional taxes and penalties, plus it significantly limits the growth potential of your retirement fund.
In Short
Max out your company’s retirement plan (if possible)
Consider a discretionary profit-sharing plan contribution
Keep the money in your account, invest it wisely, and watch it grow
For assistance with building wealth for your family through your construction company’s retirement plan, contact me for a free initial consultation.
David Stern CFO makes every effort to provide useful and accurate information. This content, however, is not intended as a substitute for specific business-related financial advice. We disclaim all warranties and liabilities from its use.