Funding retirement accounts
Over the past 20 years I’ve spent as a financial adviser, no one has ever said to me, “I wish I hadn’t saved so much money.” When it comes to retirement assets, most people try to maximize contributions into their retirement accounts. Employment with a company that has a good retirement plan can be very beneficial. In 2017, employees are permitted to defer up to $18,000 of their pay into 401(k) plans ($24,000 if they are over age
50). Additionally, many employers also match employee contributions in various percentages. Small business owners have a choice of implementing many types of plans.
Profit sharing plans, 401(k)s, defined benefit plans, and SEP’s (small employer pensions) are the main options for small businesses.
However, these plans can have significant costs to set up and maintain in terms of administration and possible mandatory employer contributions. Self-employed individuals can contribute to a traditional IRA (with a
2017 contribution limit of $5,500 under the age of 50) without having to contribute for any employees, but IRA contribution limits are too small to adequately fund an ample retirement benefit for many. Because there are so many restrictions concerning qualified plans, many high-income earners are using non-qualified plans to supplement their retirement.
More than 80 percent of Fortune 500 companies use non-qualified plans for their highly compensated employees.* There are no limits to how much money can be contributed into these plans and there is no discrimination testing, which means that business owners can do them just for themselves and they are not required to fund them for their employees.
Although there generally is no tax deduction for contributions to non-qualified plans, they can be structured to grow on a tax-deferred basis as well as to create a tax free income stream. Since we don’t know what tax rates will be when we retire, nontaxable retirement income could be very advantageous.