This week, I’m talking about retirement strategies that can reduce your business’s tax liability at year-end, as well as the different retirement plan options that may be right for you and your employees.  

In this episode, Danielle also discusses: 

  • What are the benefits of having a retirement strategy & why to implement one in your business| 2:12 
  • 3 Immediate steps to take before implementing a retirement strategy | 4:44 
  • The different retirement plan options if you are a sole proprietor or an LLC | 6:24 
  • What to think about to decide which retirement plan options are best for your business | 8:50 
  • The difference between IRA and 401k plans | 9:24 
  • Questions to ask yourself to help decide on a retirement plan strategy to discuss with your tax accountant or financial advisor | 16:00 

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    Full Episode Transcript: 

    Intro  00:00 

    Welcome to entrepreneur money stories, the podcast for women entrepreneurs who want to dig into their money stories so they can break free from limiting beliefs around money once and for all. Hosted by Daniel Hayden, owner of kickstart accounting, Inc. This podcast is a series of real conversations about money mindset with valuable and action packed takeaways for the entrepreneur who’s building their abundant empire. Danielle is a reformed corporate CFO who’s on a mission to help rural breaking female entrepreneurs understand their numbers and gain the confidence to create sustainable profits. And now here’s your host, Danielle Hayden. 


    Danielle Hayden  00:38 

    Welcome back to another episode of entrepreneur money stories. Today, we’re going to be talking about retirement strategies to reduce our tax liability at year end. I want to start this conversation with noting that this is not tax advice and that you should talk to your CPA, your tax accountant before implementing any of these strategies. I also want to start this with a note that we are not a financial advisory firm. We are a bookkeeping and financial consulting firm. So this is advice that should be implemented alongside your financial advisor. So these are ideas, concepts and strategies that you can then take with you to have a better conversation with your CPA, with your tax accountant, and have a better conversation with your financial adviser. If our Money Team is not presenting these options today, we want to give you another idea, another option to be able to bring to them to discuss how these strategies might implement your portfolio, both business and personal in its entirety. That preamble aside that, that legal disclosure aside, I want to talk about some of the retirement strategies that will reduce your tax liability. So, first of all, what are some of the benefits of having a retirement strategy in your business? There’s everal reasons why small business owners are implementing retirement strategies for themselves, as well as their employees. First and foremost, it helps both you and your employees save for your future for their future. It is really easy to be caught up in the day to day monotony of running a business and living life that we forget that we need to plan ahead and we need to be looking into the future.  


    So the retirement strategies may be your number one goal is to reduce your tax liability. However, this also helps you be able to start to think long term and plan for your future right your business is not your only asset or should not be your only asset. This gives you options to have other assets that are outside of your your business. Having a retirement option is also going to help you attract and retain qualified employees. We’re hearing this more and more from our clients that kick started counting Inc, that when our clients are hiring talent that their top talent is looking for benefit options, and that might include health insurance or health insurance, reimbursement or stipend that also includes retirement options, the younger generations are thinking about their future. And in order to be able to continue to attract and retain qualified employees. We need to be able to offer these benefits as business owners. 

     And then of course, tax savings, right? There is a tax savings to your business. There are retirement plans, startup costs, tax credits, and then there’s also tax deductions for contributing to your plan as well as your employees plan as a as an S Corp. Now, I want to I want to remind you as a business owner, that although there are benefits of this retirement plan, small business owners or private businesses are not they are not required to offer a savings plan. But this is something that you can offer for you and your employees to start to think about your future. All right, so where do we start? Right? You’ve started to think about the benefits and you would like to be able to take advantage of the tax savings and start to look to your future. So you’ve decided that you want to start exploring this option. Where do we start? We need to find a trusted financial advisor. We need to consult with our payroll provider and then we need to discuss the strategy with our tax accountant. So three immediate steps we need to take it before we even implement this. So talk to your financial advisor, consult your payroll provider, and discuss this with your tax accountant to ensure that we’re setting things up in a way that’s going to be the most tax advantageous, it’s going to sync in a really efficient way with your payroll. And it’s set up by a trusted adviser, and don’t want to go into a rabbit hole about being a fiduciary, fiduciary and what responsibilities lie within who. So talk to your financial advisor, find somebody that you are able to trust to help you bring these benefits. I personally love Gusto, for all of our clients for payroll, and Gusto has a really easy option to be able to add on a 401k. It’s not the cheapest option, but it is the easiest option. So whoever your payroll provider is, you can consult with your payroll provider, there are a lot of traditional 401k options that work in conjunction with your payroll provider. So definitely consult your payroll provider as well. So I’m gonna go through several different scenarios. Again, this is just to start to work your mind get some ideas to be able to bring to your financial advisor and tax accountant. So, if you are a sole proprietor, so sole proprietor or an LLC, and you’re looking to save as much money for retirement as allowed, and contribute as both an employee and employer, it is best to look into a solo 401k. If you are a sole proprietor, and you want to save as much money for retirement as allowed, but only want to make employer contributions, check out the SEP IRA, or a simple retirement plan that’s easy to set up, consider a traditional IRA. So again, you’re a sole provider, and you’re looking for simplicity, only to look to towards a traditional IRA. And then as a sole proprietor for a simple after tax plan that allows your money to grow tax free look into a Roth IRA. So there’s a few options specifically for you if you are a sole proprietor. Now, if you have employees, and you want to set a vesting schedule that encourages employees to be retained. So those employees are staying with your company over a longer period of time, in order for their contributions to become eligible for them to take those funds with them. A vesting schedule means that every year that they’re with your company, more of their money becomes there. So you might have contributed to their 401k. But if they leave tomorrow, they actually forfeit that money. So the vesting schedule does encourage employee retirement. So there, we will look at a traditional 401k to avoid the non discrimination testing so that you and your highly compensated employees can aggressively save for retirement, think about a Safe Harbor 401k There are some additional costs to a safe harbor 401k. And that you are required to contribute to both yourself and all of your employees, you cannot discriminate by employee, you do have to contribute to all employees. A simple plan that will allow your employees to make contributions, there is a simple IRA that is, again, easy to implement and simple. So you’ll see here that there are a lot of options, right? That’s why I keep on saying this podcast today is just for ideas. So start to think about do I have employees or my solo? And then what are my goals to this plan? You hear people talk about having goals going into every decision that you make, and having a retirement plan goal is no different. Right? We need to have a goal is the goal for us to be able to contribute as much as possible? Is it for tax savings? Or is it just having something really simple and easy to use? So we’ve used the words 401k and IRA so I just want to define the difference here. The difference between an IRA and the 401k plan is that the 401k allows employees to contribute a higher dollar amount to their accounts, allow employees to take out loans from their retirement savings, and usually offer employees the choice of pre-tax and Roth contributions. Now within traditional 401k, there are contribution limits each year and this will change each year with the tax season. However, for 2021 and 2022, those contributions were 19,500 or 26,000, and for employees 50 years old or older, so employers can contribute up to 25% of the employee’s contribution. Again, I don’t want to go into a lot of details here. This is to be able to bring to your the rest of your money team to talk about what would be best for your business. However, there is an option with a traditional 401k to be saving almost $20,000 a year, pre-tax towards your future. So again, the 401k is ideal for established small business owners that want to use a vesting schedule to encourage talent retention, or prefer not to match or contribute to employee retirement accounts. So that is your traditional 401k. Again, the traditional 401k is most popular type of employee retirement plan. It will allow your employees to set aside pre tax money, it’ll allow that your employees to be able to invest into an account that they choose. And then your employer matching contributions are optional. So if you have a really great year, you want to you want to do a profit sharing match, you can then have an option to contribute. Whereas the safe harbor plan, there are still those same contribution limits year over year. However, the safe harbor plan allows for you as a business owner or other individuals who are in your business who are high earning employees that want to invest aggressively into the retirement accounts, it allows you to be able to do that. So in a traditional 401 K plan, there are some safeguards that do not allow you to max out your contribution if your employees are contributing a small amount. So that safe harbor plan, you aren’t contributing to everybody in your company, however, you are able to max out your contributions. Now a solo one solo 401 K plan. This plan is designed for self employed entrepreneurs who want a way to save for their own retirement, only the business owner and their spouse can participate. So the solo 401k will be different if you are the only employee to your business. Alright, so we started talking about the difference between 401ks and IRAs that want to elaborate a little bit more on an IRA. An IRA is an individual retirement account. And this is the simplest type of account to set up. Everyone is eligible. So if you’re a freelancer, business owner, or even somebody who already has an employer sponsored retirement plan, you can still open a traditional IRA. This type of plan is a really popular option for people who have 401 K assets from a previous job. So you have a 401k funds sitting there from from an old job, and you need to roll that over into a new retirement account. So as a business owner, you might have worked for somebody in the past and had an old 401k with funds in it. And so when you roll these funds over into a new retirement account, they were likely rolled into a traditional IRA. There’s usually no cost to set up an IRA, but you do pay the trading fees at any expense ratios. Nothing’s free. My mom always said that nothing is ever free. This type of plan will allow you to make annual tax deductible contributions, there is a lower limit on the IRA contributions, you can only contribute $6,000. It is not structured in the same way as the 401k. So again, key takeaway away with the traditional IRA is that it’s the easiest retirement plan to set up and anyone is eligible, and there’s usually no setup costs. So if you are looking for the easiest option to be able to start to think about your future right now, you can look into the traditional IRA. Now, the Roth IRA is another type of retirement account that differs from the traditional IRA, and that it and that contributions are not deductible. Rather, you already paid income taxes on the money you invest. This allows the money that you invest to grow tax free. Now depending on who your financial advisor is and what your your investing strategy is, and what your beliefs are about the future. You might be paying a lower tax rate than you will be in the future. Or you might be paying a higher tax rate than you will be in the future. So again, depending on what your beliefs are, that might change quite a bit we can go down a rabbit hole on whether or not we believe the dollar’s going up or down. But I want to leave this end in that it is an excellent option to have some funds as part of your traditional IRA, and some funds as your as your Roth IRA, so that you are contributing some dollars pre tax, and some dollars post payroll tax. That way, when you get to retirement, you have some dollars in which you already paid taxes on, and some dollars that you will pay taxes on when you remove that money from the investment account. So talk to your financial advisor about the differences between a Roth and a traditional IRA. This is a lot, right? There’s so many words in there that you would probably have no idea what you’re talking about. That’s okay, you can come back to this episode over and over again, you can take some of the words that we talked about today, IRA 401k, you can take some of these ideas and bring them to your financial advisor to talk about what is the most important option? Or what is the best option to meet your goals as a business owner.  

    Before we make that appointment, take a moment and step back. What is your goal? In the future? What is your goal? Now? 

    Where do you see your business going? Over the next year? 

    Will you be staying a sole proprietor? Will you be hiring employees? 

    Are you ready to start aggressively contributing to your long-term financial plan? Are you interested in aggressively saving for your retirement and maybe your other employees are ready to aggressively save? 

    Once you’ve made those decisions, then you can book the call with your financial advisor and your tax accountant to talk about what is the best option to hit and meet those goals for you as a business owner, again, and I love being able to be a resource for you as a business owner. 

    Owning a business is hard. 

    Being an entrepreneur is hard. I know finance and accounting are one of the most difficult topics for you as a business owner. So, we will continue to show up for you week after week helping you dissect this information so that you have as much information as possible to make the best data-driven decisions that you possibly can for you and your business. All right, I’ll talk to you again next week.