We were asked to develop a video class for physicians on the “super 401k” concept, which works just as well for non-health care business owners with the right tax profile.
Regular 401(k)s are part of a tax-deductible retirement plan class called defined contribution plans, which really says it all in terms of how much you can put in and deduct – the contribution or investment limit is defined by tax law. As a benchmark, the 2024 limit is a total of $69,000, only $23,000 of which can come from the employee, with the rest from the employer – a trick many self employed folks miss, leaving tax deductions on the table. Post 50 year olds can get up to another $7,500 in catch up provisions.
But there’s another world of deductible retirement plans under tax law, variously called “cash balance”, “pensions”, or “defined benefit”, but we call them super-401ks because the potential tax deduction is relatively super – up to $275,000 per year, or about four times the standard 401K.
These plans are a bit more complex and higher maintenance than regular 401ks, but for business owners looking for big tax deductions they can really move the needle, provided they have the right fact patter, primarily few to no full time employees (besides family) and are in their 50s or older.
As will all tax deductible qualified plan contributions, we are really just talking tax deferral, meaning you will have to pay the tax down the road on plan distributions, so the sword is double-edged. But if you need big deductions now and have a plan to cut taxable income later to land in a lower bracket – and take advantage of all our other wealth education classes and materials to learn more on this! – the super 401k could just be your tax silver bullet.
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