Profit Sharing Plans
A Profit Sharing Plan is a qualified retirement plan where the annual contribution limits are 25% of pay or 56,000 in 2019.
A combined 401(k)/Profit Sharing Plan allows an employee/owner to “max out” the pension plan contributions; although, it is very painful to “max out” due to the amount of money required for the employees to be funded.
In order to limit the pain of funding a PSP for a company’s employees, certain testing options are used to skew the contributions in favor of highly compensated employees (usually the business owners).
The following are the main options a business has to test its qualified plan and skew the numbers in favor of key employees:
- “Integration” with Social Security
- Age-Weighting the Contribution
- New Comparability Classification Plans
“DASH 401(k)”
Are Qualified Plans Tax-Hostile or Tax-Favorable?
You may have had someone ask you if it is better to pay taxes on the harvest or the seed? What this question is asking you is whether it is a better idea to pay income taxes now on your current income (the seed) if you could let that money grow tax-free and be removed tax-free later in retirement, or is it a better idea to let your money grow tax-deferred for year in a qualified retirement plan and then pay income taxes on ALL of the money that is withdrawn (the harvest).
We’ve run the numbers and for most clients under the age of 60, paying taxes on the seed while letting your money grow tax-free and come out of a wealth-building tool tax-free in retirement will be much better than simply income tax deferring money the traditional way through a 401(k) or other tax-deferred qualified plan.
To learn how you can build a tax-favorable retirement nest egg outside of a qualified retirement plan, please click on the video box below.