401kguy.biz
  • Home
  • Blog
Fiduciary Is Fun!

(a.k.a. I heart taxes)

Tax Planning for Your Retirement Plan

12/6/2019

0 Comments

 
​At first, it doesn’t seem as if this title makes too much sense.  Afterall, 401k plans are tax advantaged vehicles and only file informational tax returns.  There is no tax owed by a qualified retirement plan.  And this is certainly technically correct.
 
However, most plans now have Roth features which allow employees to have their deferrals taxed prior to them being deposited into the plan.  The advantage to Roth is that even though the deferrals are taxed initially, all future earnings on those deferrals can be withdrawn (with a few minor restrictions) tax free by the employee.  Pretty niffy.  Even so, the vast majority of 401k deferrals (and 403b deferrals) are pretax, meaning that employees will pay ordinary income tax on the deferrals AND all earnings when they withdraw those funds.
 
So tax planning for your retirement plan is really more of an employee issue versus an employer issue, and what a planning opportunity it is!  I am working with one of my clients now in anticipation of conducting employee meetings in early January to focus specifically on this issue.
 
Some details:  After the passage of the Tax Cut and Jobs Act in late 2017, the marginal tax rates for most Americans dropped. The marginal rate is only 12% for a married couple earning no more than $78,950, and it only increases to 22% if that couple earns no more than $168,400.  That covers a lot of young couples in this country!  In fact, my client has the majority of their employees under 30 and earning around $40,000.  Most are basically in the 12% marginal bracket.  Is it worth getting the traditional 401k tax break for deferrals for such a group?  I would argue NO.
 
People tend to think Roth or no-Roth and leave it at that.  I believe there are some pretty compelling arguments to be made that when employees are early in their career and earnings are more modest that Roth makes absolutely good sense.  Later in their career when they might be in the 35% or 37% tax bracket, if they are so fortunate, then traditional 401k deferrals might make sense.  You can always change!
 
So what makes the most sense for your employees?  What are you advising them as you enter into a new year?  Just as importantly, what is your advisor saying?  And does your advisor have the skill set to even make such recommendations?
 
If you would like an additional perspective and some thoughts on how to position your employees for long term financial success, give me a call.  I would love to visit about optimizing tax benefits. Just the thought makes me warm all over!
 
Pete Welsh a/k/a 401kGuy
0 Comments



Leave a Reply.

    Picture

    Archives

    July 2020
    June 2020
    May 2020
    March 2020
    February 2020
    January 2020
    December 2019
    November 2019
    October 2019
    September 2019
    August 2019
    July 2019
    June 2019
    May 2019
    April 2019
    January 2019

    Categories

    All
    1031 Exchange
    401k Plan
    501(c)(3)
    Benefits Programs
    Best Practice
    Buy Sell Agreement
    CARES Act
    COVID 19
    COVID-19
    CPA
    Cyber Security
    Data Breach
    Defined Benefit Plan
    Eligibility
    Emergency Fund
    ERISA
    Estate Planning
    Financial Education
    Financial Planning
    Financial Stress
    Form 5500
    Hardship Distribution
    Healthcare Costs
    Health & Wealth
    Income Taxes
    Insurance
    Investing
    Investment Advice
    IRA
    Lawsuit
    Life Insurance
    LLC
    Member
    Parents
    Partnership
    Part Time Employees
    Plan Audit
    Profit Sharing
    Recruiting
    Rehring Employees
    Required Minimum Distributions
    Retirement
    Retirement Plan
    Retirement Planning
    Retirement Readiness
    Roth
    S Corp
    S-Corp
    Seasonal Workers
    Shareholder
    Signing Bonuses
    Social Security
    Student Loan
    Tax-Deferred
    Taxes
    Tax Exempt

    RSS Feed

All services discussed on this site offered through JarredBunch Consulting, LLC, a SEC-registered investment advisor.
3625 E 96th Street
Indianapolis,IN 46240
317-202-1891
  • Home
  • Blog