Saturday, July 02, 2005
Reaping Retirement Rewards
Learn how to stash $44k in your 401(k) this year!
By Christine Regan Lake
Yes, you read that correctly, $44k in your 401(k) plan in one year. Sounds great doesn’t it; well it gets even better, for husband and wife business partners this means you could save a combined $88,000 per year in total!
Many people assume that the maximum they can save in a 401(k) retirement plan is $15,000. It is true that this is the 2006 maximum for employee deferrals (plus an extra $5,000 for those age 50 or older.) As many of you may know, 401(k) plans are most often used by owners to attract and retain talent, since it allows employees a way to save their own money through a 401(k) deferral. Some employers decide to add a match in order to be more attractive to employees.
However, in most plan designs, owners are treated as just another employee with respect to what they can save for themselves. Owners need to know that that there are ways to give themselves the maximum savings amount allowed, without having to also give it to every employee.
How is this possible? What about those discrimination tests that must be passed in order to maintain the tax qualified status of the plan? What about those laws that say you can’t favor the highly paid employees?
There is no doubt about it, the body of law that governs retirement plans is vast and complex, but as in life, education is a beautiful thing. Not to get too mired down in details, suffice it to say that there are two things to consider; the plan document itself (which details your allocations and such) and your actual plan investments. Most people end up using whatever plan document is provided to them by the 401(k) provider. What most people do not realize is that they do not have to use the plan document that is provided with their chosen investments.
It is possible to make separate decisions with respect to who takes care of your money, and who takes care of your plan design and contribution strategy. What happens most often is the institution or individual that is overseeing the selection and management of the investments presents a document to you and says “sign here and we will get started.”
“The challenge is a plan document can be part of the solution or part of the problem in allowing owners to keep more of the contribution legally,” says Lori Gordon CEO of MandMarblestone Group www.mand.com. Unfortunately, the vast majority of plan documents are part of the problem. They are developed and written in order to make the administration of the plan and the required governmental reporting easy for the financial institution to perform. Smart idea for the
institutions since it makes their life easier, but not necessarily in the owner’s best interest.
For most of us, the value of our businesses represents a huge component of our retirement planning. Unfortunately, many business owners operate under the assumption that the eventual sale of their business is their retirement plan. This is a big mistake. The market can change, the value of a business can tank for reasons beyond your control. Business owners need
a separate retirement plan option that they can fund now, so they can play later!
Leave a Comment