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LEARN MORE ABOUT: 401k Plans

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As a business owner, there are a lot of complex financial considerations to keep in mind, especially when it comes to saving for retirement. One unique option that may be available to you is a little-known 401k trick that can help you maximize your contributions and save more for the future.

The trick involves taking advantage of a provision in the tax code that allows business owners to make “profit-sharing contributions” to their employees’ 401k accounts. Essentially, by creating a profit-sharing plan through your business, you can contribute a percentage of your company’s profits to your employees’ retirement accounts. This not only helps your employees save for their own futures, but it can also benefit you as the business owner.

The key is in structuring your profit-sharing plan in a way that maximizes your own contributions to your own 401k account. Here’s how it works: let’s say that you want to contribute 20% of your company’s profits to your employees’ 401k accounts. If you set up the plan as a “cross-tested” plan, you can allocate the majority of those contributions to yourself and other highly compensated employees.

In a cross-tested plan, contributions are divided into subgroups based on employee demographics – for example, older vs. younger employees or highly compensated vs. non-highly compensated employees. By setting up the plan in this way, you can allocate a larger portion of the profit-sharing contributions to the subgroup that includes you and other key employees.

The result is that you can contribute more to your 401k account than you would be able to under a traditional profit-sharing plan. This can potentially save you thousands of dollars in taxes each year, while also helping you build a larger retirement nest egg.

Of course, there are some caveats to keep in mind when setting up a profit-sharing plan. You’ll need to consult with a financial advisor or other expert to make sure that you’re structuring the plan in a way that complies with all relevant regulations and doesn’t discriminate unfairly against non-highly compensated employees.

You’ll also need to be aware of your company’s financial situation and budget your profit-sharing contributions appropriately. While it’s great to be able to save more for retirement, you don’t want to put your business in financial jeopardy by overextending yourself with contributions.

However, for savvy business owners who are looking for a way to take advantage of the tax code and save more for retirement, a cross-tested profit-sharing plan can be an incredibly valuable tool. By working with a financial advisor or other expert to set up the plan properly, you can enjoy greater financial security in your later years – and potentially save a lot on taxes in the process.