One of the best ways to lower your tax bill this year isn’t another deduction.
It’s the retirement plan you pick for your business.
Hi, I’m Ken Hargreaves. I’m a Certified Financial Planner and founder of WealthGen Advisors. When a business is profitable, every extra dollar has choices. You can take it as income and pay tax now, or you can run it through a qualified retirement plan and have it show up as a deductible business expense that also builds retirement savings for you and your team.
Same dollar, different outcome.
The hard part is that not all plans work the same way.
A traditional 401(k) is familiar and flexible. Employees defer, you match, and the match is deductible. That’s straightforward. But if employee participation is low, required testing can limit how much you, as the owner, are allowed to contribute.
A Safe Harbor 401(k) addresses that issue. You commit to a set employer contribution for everyone, and in return, you’re able to maximize your own deferral without worrying about refunds. Predictable costs, predictable deductions.
A SEP IRA goes in the opposite direction. It’s very simple and very deductible, but everyone receives the same percentage contribution. That can work well when profits fluctuate and you want the flexibility to decide, even late in the year, how generous the contribution will be.
For firms with steady, higher income, it’s also possible to stack plans, such as combining a 401(k) with a cash balance plan. This allows you to move significantly more money out of taxable income and into retirement without increasing staff benefits dollar for dollar.
Which plan makes the most sense depends on your payroll mix, your business entity, and how much you actually want to defer.
If your retirement plan was set up a few years ago just to check a box, it’s worth reviewing it through a tax-efficiency lens. A small design change can often do more than squeezing another expense into December.
I hope this video was helpful. Feel free to follow for more financial insights.
