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The sweet spot for your 401k may not be 55k! It’s important to look at your overall compensation, your SE tax and if you are going to fund your spouse’s or children’s 401ks. It’s not always the best to go all the way! Maybe there’s a better place to be in your financial plan. Make sure to watch all the way to the end to know your options!
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LEARN MORE ABOUT: 401k Plans
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As part of a long-term financial plan, a 401K can be a great way to save for retirement. It is a type of retirement savings plan that is offered by employers to their employees, which allows them to contribute a portion of their income before taxes in a variety of investment options. The contributions are deducted from the employee’s paycheck, and the earnings grow tax-free until the money is withdrawn for retirement. However, in order to maximize the benefits of a 401K, it is important to understand the sweet spots that can help you achieve financial success.
Mark J Kohler, a CPA specializing in tax and legal issues for small business owners and entrepreneurs, explains the sweet spots for 401Ks. According to Kohler, there are four sweet spots that you should be aware of, including:
1. Matching Contributions: Many employers offer matching contributions for their employees’ 401K plans. A matching contribution is when the employer contributes a percentage of the employee’s contribution to the plan. For example, if the employer offers a 50% match up to 6% of your salary, and you make a contribution of 6% of your salary, your employer will contribute an additional 3% to your plan.
2. Tax Benefits: 401K contributions are made with pre-tax dollars, meaning that the money is deducted from your paycheck before taxes are applied. This reduces your taxable income and can lower your tax bill.
3. Compound Interest: The earlier you start contributing to a 401K, the longer your money will have to grow. Compound interest is the interest earned on both your initial contribution and the interest it generates over time. The longer your money is invested in a 401K, the more you will earn through compound interest.
4. Investment Options: 401Ks offer a variety of investment options, including stocks, bonds, and mutual funds. By diversifying your investments, you can reduce the risk of losing money and increase your chances of earning higher returns.
In order to take advantage of these sweet spots, it is important to make regular contributions to your 401K and to invest in a variety of options. In addition, you should try to maximize your employer’s matching contributions by contributing at least the maximum amount allowed by the plan.
Overall, a 401K can be a powerful tool for building wealth over the long-term. By understanding the sweet spots of a 401K, you can take advantage of its tax benefits, compound interest, and investment options to achieve financial success.
If you can do a mega backdoor after-tax conversion to Roth, then this doesn't matter, right? Couldn't you max out without having to have a high salary?
Confused on mechanics, Mark – Do you have to put your spouse on Board of Advisors to do this? What is the method requiring minimal paperwork? (Currently LLC, taking S-corp election Jan 1.) Also, can you just journal a payment against an equity account and fund the SoloK contribution from a personal account? (How Is the answer different if Single member LLC vs SMLLC w S-corp election?)
There's like 4 buckets. 401k: ($19,500, employer contributions (max 25%), employee after tax contributions (max $58k)), and non-tax distributions from your s-corp. So many different levers how would you possibly know what is optimal? I guess it depends on your goals too. In my mind, only take down as much income into your hands as you need to pay your own personal mortgage and keep the lights on. Every other penny should be saved for retirement in Roth-type accounts so you can get rid of the IRS from your life some day.
Weird there is only 238 likes on this video. This is good info. (Kind of specific to people who want to squirrel away TONS of money into tax advantaged accounts.)
When you say 401k, are you referring to all 401k? Even solo 401k? I am about to set mine up for the year and was gonna make it out. Can I set up an appointment with you on the phone?
i am confused
Ok so if it is an S corp and now paid the 50k to husband and then 20k to spouse wouldn't the SE tax be the same pay out as if it was all paid to the husband in total on 70k? The corp would pay the half on 70k as it would on 20k and 50k right? I do see where the 18500 is contributed by the husband and the wife can also do the 18,500 and then the Scopr put in the 25% but why break it up>? Thank you much and really love the way you explain, it makes it easy to under stand.
If you have a S-Corp, Why don't you do employer contribution (profit sharing) to the 401k?
Why is 160K roughly 146K?
55,000-18,500=36,500/.25= 146,000
I get you are making a point but why use the wrong numbers. You are emphasizing $10k while making a $14k error.
What would be best for business owner with employees salary is 70k
Married ,i could put my wife on payroll
(S corp.)
Looking for something for retirement
I can put a lot in prefer roth ira 401k.
Thanks. 40m 43w
Don’t you have to pay FICA on the spouse’s salary anyway? I don’t see how that helps except for funding a separate “bucket”.
Great advice as always Mark. I was just discussing this with a CPA firm yesterday. Just because you can do something does not mean it is always the best strategy. You truly do great work for your clients.
https://seetheforestthroughthetrees.com/
Your energy is great !!!
Sorry what’s the “55k” sweet spot supposed to mean
Great stuff Mark, always great material
Love that you do these short videos to generate ideas. Keep it up~! Not at all crazy about 401k investing but maybe there is something I don't understand about the "numbers on paper" investing that I can learn.
Thank you
Nice pointers Mark. Love it!