Optimizing Year-End Business Benefits Part 1: Plans and Expenses

Ken Hargreaves, CFP®, AIF®, AWMA®, CRPC®

As a business owner, your focus is often on managing operations, growing your customer base, and ensuring the long-term success of your company. However, with the end of the year rapidly approaching, it might be time to step back and assess your company’s and your own end-of-year financial health. Taking the right actions before December 31st can help optimize your retirement savings (and those of your employees), minimize taxes, and set your company on a stronger financial footing. In this article, we’ll walk through some key strategies you can implement while there’s still time to make a meaningful impact.

Analyze Your Retirement Plan Contributions

Before we get into the details, let’s review the kinds of retirement plans available to small and medium-sized businesses. If you don’t have a plan in place, we can help you choose what’s best for you. If you already have one, perhaps a refresher may initiate a rethinking of your current plan.

  • SEP IRA: Allows you to contribute up to 25% of your compensation, with a maximum limit of $69,000 for 2024. Contributions are made solely by the employer, providing a significant tax deduction for the business.
  • SIMPLE IRA: Ideal for businesses with 100 or fewer employees, this plan allows employee deferrals up to $16,000 for 2024, with an option for employers to match up to 3% of compensation or make a 2% non-elective contribution.
  • Solo 401(k): Offers both employee and employer contribution flexibility, allowing you to contribute up to $69,000 in 2024, or $76,500 if you’re over 50.

So, let’s assume you have one of the aforementioned plans in place. If you don’t, we can help you establish and manage one. Otherwise, let’s get into the kinds of moves you can make before the end of the year or, perhaps just as important, what moves you might not want to make.

Should You Maximize Contributions?

Reviewing your company’s benefits now can help you understand how much you want to contribute to your own retirement plan and your employees’. If your plan allows, you can also adjust the contribution amounts to their accounts. For example, if you have a SEP IRA, what’s best: contributing now or waiting until the tax deadline? Is there an optimal amount that could maximize tax benefits for your business? Should you maximize contributions or simply not contribute at all? Yes, you may have that choice with a SEP IRA and a Solo 401(k).

What we’re looking for is balance. The earlier you make contributions, the more time your investments will have to potentially grow. But if contributions would strain your current financial situation or could hamper your tax situation, perhaps you should delay or possibly not even contribute at all. Your exact options will depend on the kind of plan you have.

SIMPLE IRA Employer Matching Obligations and Nonelective Contributions

A SIMPLE IRA is a bit different than the SEP or Solo 401(k) in a couple of different ways. Firstly, employee contributions are automatically deducted from their paychecks, and you have the responsibility to deposit those deductions to their respective accounts within thirty days. Your employer match, however, comes with more flexibility.

When creating a SIMPLE IRA, employers have two contribution options: either match employee contributions up to 3% of their compensation or make a non-elective contribution of 2% of each eligible employee’s compensation, regardless of whether the employee contributes.

Employer matches come with two nuances: your employees may not elect to contribute to their plan, meaning you might pay less out of your own pocket. Additionally, you have the option to reduce your match to only 1% in any two out of five years, giving you greater flexibility in your financial planning. Be aware, though, that you are obligated to notify employees of a reduced match before the 60-day election period, which begins on November 1st.

Non-elective contributions are more straightforward, but they do come with their own important considerations. Firstly, keeping track of your contribution obligations is much easier than determining how much you should contribute to each employee’s account based on their own contributions.

Secondly, you cannot reduce your contribution amount each year, so you will have less overall flexibility. However, depending on the contribution behavior of your employees, you could end up paying less overall than if you committed to a match.

Tax Benefits of Employer Contributions

Employer contributions are not simply gone to the wind. Beyond the less tangible benefits of attracting and retaining talented employees, they also provide the quite tangible benefit of reducing your tax obligation. Contributions are counted as a business expense, meaning your tax bill will, as a result, be lower, which could allow you to reinvest those tax savings further into your business or pad your own investment account.

For newly established plans, you may also qualify for a tax credit of up to $5,000 per year for the first three years, plus an additional $500 annual credit for including automatic enrollment features, helping you offset the costs of setting it up.

Defer Income and Accelerate Expenses

If your business has had a strong year and pushes you into a higher tax bracket, you may be able to delay some of your income by officially receiving it next year. For example, let’s say you have a sizeable invoice for a client. Instead of sending it to them now, you can hold off until January to send it to them so that those funds won’t be counted toward this year’s income but rather next year’s income. However, that should lead you to consider next year’s tax situation: have you forecasted even further growth for the following year? If the answer is yes, perhaps it’s best to receive as much income now.

At the same time, you may be able to accelerate your expenses, leading to increased deductions for the current year. For example, let’s say you plan on upgrading your IT system in February. Upon close inspection of your finances, you determine that upgrading now could reduce your taxable income enough to drop a tax bracket – so why wait?

In Conclusion

As you can see, you have numerous possibilities to fine-tune your end-of-year business plannin; you can optimize your contribution strategy for your employees’ and your own retirement savings, accelerate expenses, or even defer your income until the next year based on your tax situation. Running a business keeps you busy, and it can be hard to fully explore the details of your benefits and expense strategies. This is even more challenging when considering not just this year but the long-term impact on your working and retirement life.

That’s where we come in. Working with a financial advisor who understands the unique intersection of business and personal financial planning can help you craft a strategy that not only benefits your business but also supports your personal financial success. At WealthGen Advisors, we’ve helped numerous businesses like yours optimize their year-end planning by customizing solutions that address retirement savings, tax minimization, and long-term financial security.

To discover how we can help enhance your business and personal financial plans, click the button below to schedule a consultation.

Disclosures

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author/presenter as of the date of publication and are subject to change and do not constitute personalized investment advice.

A professional advisor should be consulted before implementing any investment strategy. WealthGen Advisors does not represent, warranty, or imply that the services or methods of analysis employed by the Firm can or will predict future results, successfully identify market tops or bottoms, or insulate clients from losses due to market corrections or declines. Investments are subject to market risks and potential loss of principal invested, and all investment strategies likewise have the potential for profit or loss. Past performance is no guarantee of future results.

Please note: While we strive to provide accurate and helpful information, we are not Certified Public Accountants (CPAs). The information in this article is intended for informational and educational purposes only and should not be interpreted as tax advice. It is crucial to consult with a CPA or tax professional to discuss you

Author

  • A Florida native, and full-time Sarasota resident, Ken founded WealthGen Advisors, LLC after spending more than fourteen years in the financial advisory industry. Ken holds multiple industry designations, as well as a master's degree in Financial Planning. Prior to founding WealthGen Advisors, Ken spent almost a decade in New York and then Texas as Vice President at The Capital Group, a $2T global investment manager serving institutional clients and pension funds.

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