Become a Creator today!Start creating today - Share your story with the world!
Start for free
00:00:00
00:00:01
Retirement Plans
341 Plays3 years ago
Sorting out the alphabet soup of letters and numbers that describe various retirement plans can seem like a daunting task. But employees and employers alike can use these plans to reduce current tax liability and gain investment exposure, so it’s valuable to understand these tax-advantaged options and how to use them to advance your goals.
This week on the show we’ll sort through the noise and help you understand the differences between various retirement plans (like SIMPLEs, SEPs, 401ks, 457s, etc.) and who gets to use them (sometimes the type of plan is dependent upon who you work for). Also, how additional options like cash balance or defined pension plans target “later” money to extend the retirement offering and expand how much money can be directed into retirement benefits, with the accompanying tax impacts.
This podcast is for informational purposes only and shouldn’t be considered advice. It’s always a good idea to get some help from a licensed professional if you’re looking to create or extend your business retirement plan.
Recommended
Transcript
Introduction & Hosts
00:00:02
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
a life worth celebrating and savoring. Please welcome your hosts, Brian Dewhurst and Phillip Ramsey.
Retirement Plans Overview
00:00:35
Speaker
Hello and welcome everybody to another episode of the Uncommon Life Project where I am your host, Phillip Ramsey. And I'm Brian Dewhurst. Thanks for tuning in. Today we have a duo cast is what we call this, which is Brian and I. We're going to talk about retirement plans.
00:00:50
Speaker
So don't fall asleep, but this will be for the individual that just is an employee. And then we're going to try to dovetail this to the business owner. So for people who maybe own a business, this isn't another option that you can do to one accumulate money, but also potentially lower your tax burden.
IRA Plans Explained
00:01:12
Speaker
So Brian, what are your initial thoughts early on in the podcast?
00:01:16
Speaker
Early on, it's a beautiful day outside. It's gorgeous. The birds are chirping. And we're going to try to keep everybody awake with retirement plans. There you go. Also, we should probably tell you this, that we shot this in 2022. So if you're listening to this, and it's closer to 2023, some of the numbers might have changed. So I think that looks good. This one isn't. Some of the concepts are evergreen, and some of it's going to be not evergreen.
00:01:44
Speaker
Yeah. Okay. I want to start with individuals because I feel like there's a lot of listeners that are just individuals. There's a lot of business owners too, but we're trying to fly through this. It's kind of like a high level, what you can do with a retirement plan, what kind of our recommendations are normally to people. And that's again, normal. We sometimes have caveats, but kind of give recommendations of what you should do with your own current 401k plan if your employer provides it.
00:02:12
Speaker
So, let's start there. Where do we start? And this is for informational purposes only.
401k Plans & Regulations
00:02:17
Speaker
If you want a specific plan, call us. Yeah. We're just trying to speak in general terms and make people aware of what their options are. We're not trying to give financial advice in this podcast. So, I'll caveat that.
00:02:31
Speaker
That's good. It's the best like compliance. Good job. So there's lots of different plans and lots of people fall under, you know, several different structures. And so we just kind of want to walk through the main structure. So like, if you're an employee, you don't own a business, and you're part of an employer plan, you're probably going to fall into one of these four, I would say, maybe five, we'll go five.
00:02:53
Speaker
The first one is a simple IRA plan. A simple IRA plan is exactly as it sounds. It's an individual IRA that's simple for the employer to manage. It is not a 401k plan. The limits on a simple IRA are different than a 401k. They're smaller.
00:03:15
Speaker
Principally, principle wise, it kind of works very similar to a 401k in the sense that you can make an employee contribution. And for 2022, that number was 14,000 a year. And the catch up is so if you're over 50 years old, the government allows you to put in a little bit extra. That's 3000. So total you can put in 17,000. Right.
00:03:39
Speaker
So, that's a simple IRA. Let's jump into... Wait, let's just talk normally in simple IRAs, your employer matches up to 3%, meaning if you only put 1% of your salary in, your employer only matches 1%. If you put up 6%, your employer only matches 3%. So, that's usually kind of how that works.
Comparative Analysis of Retirement Plans
00:04:03
Speaker
The thing we hate about simples, and we have a lot of simple IRAs that we administer, so I'm not saying we don't do them, but if you start a simple IRA, the money is trapped in there for two years. So just know that, that it's a two-year commitment if you start contributing to a simple IRA. Okay. Not the worst thing in the world if you like your employer and you want to keep going, but just something to know. Yep.
00:04:27
Speaker
Good. Okay. If you have a simple, here's my question to you, Brian. Can you have another IRA outside the simple? Yeah. So I think we'll hit this on the front end and then let's hit this on the back end as a reiteration. Yep. As an employee, no matter what type of covered employment you have covered, meaning you're covered by an employer retirement plan, you can only put away $20,500 for 2022 as an employee.
00:04:55
Speaker
If you are over 50, then that number goes up because of the catch-up. But there's a federal limit of how much you can put into a simple IRA and an IRA. If you want to only get the match in the simple IRA and put in the 3% to get 3%, but then you want to contribute another $6,000 to an IRA, you can do that. All of that's going to be disclosed on your tax return.
00:05:20
Speaker
and you want your tax preparer, if that's you or somebody else, to kind of watch those limits and adding those things up to make sure they don't exceed your federal allowable limit annually. Right. And for 2022, that is $20,500 if you're under 50. If you're over 50, that is $27,000. Yeah, and I want to double check that with our accountant because I don't know. I think that's right. But
00:05:49
Speaker
I want to double check your tax person. We aren't tax people, but right seems like
Safe Harbor & Government Plans
00:05:53
Speaker
that. So, but yeah, I feel comfortable with the 20,500, but I don't know about the ketchup. Um, so anyways, actually ask your accountant on that one, but
00:06:03
Speaker
There's so many rules to all this, like that's why we caveat it because it's like, and they change this stuff every year. So it's a lot to keep track of, but let's keep going. Yeah. Okay. Good. So that's a simple. So the next three are all the same structure. It just depends on what industry you're in. So a safe harbor 401k.
00:06:21
Speaker
we really won't do a 401k for a business owner unless they do safe harbor and what safe harbor means is that you know basically you're saying hey i'm gonna give my employees certain provisions within this foreign k plan so that we don't really have to get audited and it kinda just take some of the red tape out of it.
00:06:41
Speaker
And it's basically confirming you're going to give like a certain percentage of a match. I don't want to get into all that because there's certain ways, there's a lot of different ways to structure it, but you're basically agreeing to certain standards of your 401k to limit the red tape and the chance of being audited and all of that. And it also affords the business owner to put away, you know, potentially more money. So we'll kind of leave it there.
00:07:04
Speaker
But a 401k, because I think it's important that employers understand that when an employee understands that and when an employer starts a 401k, there is a lot of red tape. There's a lot of just rules they have to follow. My question to you, Brian, is why is there so many rules?
00:07:28
Speaker
I think it's a pay to play type situation. The more money you're allowed to put away, the more rules there are, right? Right. And so the government, you know, just they just passed this bill, the Inflation Reduction Act, that's going to bring on 87,000 IRS agents, which is just mind boggling. But the government wants their money. And so the more they're allowing you to put away within these plans,
00:07:54
Speaker
The more red tape there is to protect the employees so that the, you know, bad evil business owner isn't, you know, putting all this money away and not avoiding tax, but I mean, these are these are black and white tax deductions, but.
00:08:08
Speaker
making sure that they're not doing it, um, you know, at the peril of their employees. So there's, there's certain provisions to protect the employees as a business owner is allowed to put away more money. So, and I think that's a good thing. Yeah, I agree too, but there are just a lot of red red tape and a lot of different things that they have to do balances audits that could be performed. That's why it gets a little bit, I don't know.
00:08:32
Speaker
sketchy and that's why a lot of people just go to the simple IRA, then you go up to 401k because when the 401k is introduced, there are fees involved. So, okay, keep going. Okay, so in general, the 401k is a retirement plan structure for for-profit companies. So, Wells Fargo, Costco, Verizon, big principle.
00:08:58
Speaker
Yeah. All like, if you work for a for profit company, the 401k is the structure that is probably going to be used. If you're in healthcare, like, uh, if you're working for a hospital, you're like a nurse or a doctor, uh, or you work for like a school system, uh, any of that type of stuff. Uh, and then also nonprofit. So if you work for like, I don't know, junior achievement or, you know,
00:09:26
Speaker
Meals of the Heartland, whatever charitable organization, all those are utilizing a 403B. So a 403B is the same structure as a 401K. It's just dependent on what type of business entity you're working for.
00:09:43
Speaker
Nice, universities also use 403b structure as well. So if you're in that type of employment, again, covered employment, you're probably going to be under a 403b retirement plan. It works very similarly and is basically the same thing as a 401k.
00:10:00
Speaker
The 401k is just for for-profit companies. Then the last structure that is similar to those is what we call a 457 plan. And that covers government employees. So if you work for the post office or any type of government agency, you're covered under the 457 plan. They're all pretty similar in structure. It's just, again, industry dependent on where you fall in terms of your covered employment.
Roth 401k and SEP IRA for Small Businesses
00:10:29
Speaker
Right. Good. So in the 401k, let's kind of just focus there. The limit for 2022 is 20,500 as an employee with a 6,500 ketchup. So if you're over 50, you can put $27,000 away in your 401k and deduct it.
00:10:49
Speaker
And again, we're speaking in terms of like the simple IRA, the 401k, the 403b and the 457, these are all tax deductible contributions or pre-tax is another word for it or traditional 401k, qualified plan, all these terms are the same thing. Meaning that you're taking the tax deduction on your contribution now, deferring that tax to when you take the money out. And when you take the money out, it's fully taxable.
00:11:15
Speaker
With a 401k, there is a Roth provision. Now it's very standard. Pretty much any 401k should have a Roth 401k feature. And as an employee, you can put money in the Roth 401k and the limits are the same.
00:11:31
Speaker
Your employer match will be on the qualified side or the pre-tax side because the business owner is taking that tax deduction. So if the business owner in the 401k is matching you 4%, he's deducting that as the business owner as an expense to the business and that's why it's going into the pre-tax bucket. So even if you put your part in the Roth, the match is going to go in the pre-tax bucket. Which is important because I think Roth IRAs outside of 401k plan have a lot of
00:12:00
Speaker
Regulations. A lot lower. Yeah, and it's a lot lower. A lot lower limit, too, that you can put in. Limits that you can put in. And then if you make over such and such an amount, you can't contribute to them. And at 401k, all that goes out the window. So. Yeah. So if you're high net worth and you own a business and you want to do Roth, you got to set up a 401k. So there's ways to do that. Anyways, we can kind of get into that if you had specific questions.
00:12:28
Speaker
There's a way to kind of basically put in three times more money into the Roth 401K than just having a Roth IRA. But that's kind of more of a specific conversation. So those three types, the 401K, the 403B, and the 457 are all generally the same kind of type. It just depends on where you work. So we have the simple, the 401K, the 403B, the 457, and then the last main retirement. Let's go back here. I want to say one thing because we talked about this as a simple.
00:12:57
Speaker
Remember that their employee then contributes to normally some kind of match in those. Would you agree? Yeah, there's typically a match in all of them. Yeah. Right. I think the government plan, like the federal government matches 6%.
00:13:19
Speaker
Right, and that depends on, and that's what you have to ask your employer what it is. What is the match, and so I kind of understand that. Okay, sorry, keep going. No, that's good. So the last one I would say of the five main retirement plans you're probably going to be under is a SEP IRA. A SEP IRA is typically for more of like a, I would say probably like a family owned business where you have multiple family members that you want to put money away for.
00:13:46
Speaker
Probably fewer non-family employees. And the reason that is is because whatever the business owner puts into their SEP, they have to do as a percentage of salary to your SEP. So it's not as traditionally used where you have multiple employees because it's very expensive for the business owner to put away lots of money.
00:14:07
Speaker
So SEP is really good for single member businesses. There's only one person and they're using contractors, which they don't have to put away for contractors. Or you have multiple family members within a business and they obviously want everyone in the family to benefit.
00:14:23
Speaker
That's typically what a SEP is used for. It's an individual
Retirement Strategies for Business Owners
00:14:30
Speaker
IRA plan. It's a simplified employee pension plan, but the pension term is deceiving because you can invest a SEP into pretty much anything you want, mutual funds, ETFs, stocks, bonds.
00:14:45
Speaker
annuities, whatever. So the SEP is really cool from an investment standpoint because it's very flexible. You can invest it in anything you want. So that one is probably the most open architecture of the five, whereas a simple IRA typically, you know, you're relegated to kind of like mutual funds or a brokerage account. 401k, 403b, and 457 is typically all mutual funds.
00:15:11
Speaker
unless you open or your plan has a self-directed brokerage account feature, which we talked about in kind of our Howard podcast. You know, we can move money into a brokerage account within the 401k and kind of expand your investment horizon or lineup that you have access to, but that's kind of a separate point.
00:15:29
Speaker
Good. Okay. So those are the five, I would say main plans that 99% of America is covered by. Right. And I think it's good to just know there's more than those five, but I think just highlighting the most years is the better way to go. All right. Now let's move to a business owner and then kind of talk through kind of like, Hey, if you're here in your business, this one might be helpful for you.
00:15:54
Speaker
And this is why, um, and then I would, I would do really want to focus on the defined benefits, uh, and the cash balance plan at some point that'll be cut at the end. But let's go through this. Now as a business owner, different perspective, and it might even be good for employees to hear this because this is the way that we're at least counseling, uh, business owners, uh, in order to bring out this benefit. Yeah. So.
00:16:20
Speaker
We kind of try to just draw the line in the sand from a numbers perspective and like what your high level goal is. Really to us, there's really two main reasons a business owner adopts a retirement plan. One is he wants to put money away, typically and deduct it, or they could do Roth. If you're a younger business owner, no kids, you're in a low tax environment, you want to keep doing Roth, it's a great thing.
00:16:46
Speaker
As you get older though you pay more tax you know a lot of our business owners are using the 401k structure to reduce tax. But the simple is kind of where we start if you have multiple non family member employees like one to ten.
00:17:02
Speaker
If the business owner is not going to put away, you remember they contribute as well like an employee. So if you remember on the simple, the limit for 2022 is 14,000. And so if the business owner is not going to max out or get to the upper threshold of what you can put away in a simple, then a simple is probably a good bet.
00:17:22
Speaker
You know, so you're putting away the fourteen thousand for yourself plus three percent of your salary Let's just say you're paying yourself a hundred grand a year, you know, that's three grand So that's seventeen thousand you could put away in a simple like if you're only gonna do, you know five ten twelve Simple is probably a really low cost
00:17:38
Speaker
great way to get coverage in terms of a retirement plan, offer a benefit to your employees, and start putting away money for yourself. There's no rough feature in a simple IRA, so it's one-dimensional in terms of you're forced to take the tax deduction now, money goes in, will be taxed later. And there's a two-year requirement. Once you start a simple, you gotta do it for two years. So that's kind of where the line of exam is. Let's say why a business owner might not want to contribute it fully. It's because they're still growing the business.
00:18:06
Speaker
They want to have a benefit. They want to be able to use that to attract people to their business. But at the end of the day, they have either a lower budget or they're pouring all their money back into the business to grow the business even bigger. So that's the second reason an employer starts retirement plan is employee retention and benefits like right. We have several young business owners that have simple or 401ks. They're not maxing them out because
00:18:32
Speaker
They are trying to still buy their dream house. They've got young kids. They've got student loan debt they're trying to pay off. You have now money type things you're trying to accomplish. Packing a retirement plan does cost you liquidity and you do get a tax deduction.
00:18:51
Speaker
There's only so much cash to go around when you're a business owner sometimes. The other main reason to start a plan though is employee retention and giving a benefit to your people to retain talent. Those are the two main reasons. Typically, someone starts a retirement plan.
00:19:07
Speaker
And as of age, you know, then it becomes typically more and more about putting money away for yourself, still maintaining a value of benefit to your employees. But that's typically kind of how it goes. So anyways, if you can put away more than the 17,000 or you're over 50 and you can put away more than like 20,000.
00:19:27
Speaker
Then you really want to just step into a 401k plan, in our opinion, unless you're a single owner and you're kind of, you could do a SEP or a solo 401k. But yeah, like we're typically recommending a safe harbor 401k for business owners with more than, you know, two to five employees and they want to put away more than 18 to $20,000 a year.
00:19:51
Speaker
Perfect. All right, let's move on. So if you want to max out the 401k, we kind of have a document. We call it the cake, three layer cake, but it kind of compares as simple on a 401k. But I kind of explained this after 100 times. I'm like, we need a visual aid for this because it's just so mind-numbing to explain this. So I kind of just came up with the concept of a three layer cake. We're all familiar with eating cake, and we're all familiar with layered cake.
00:20:19
Speaker
So, the bottom layer is your employee contribution. We kind of already touched on it. In 2022, you can put away $20,500. If you're over 50, that's $6,500 additional, so $27,000. So, as a business owner, you're an employee of your company, you can put away $27,000 as long as your W2 salary is above $27,000.
00:20:40
Speaker
And you're over $7,000. Yeah, and you're over $50,000. Without involving your employees, without involving your match, whatever. You can just do that. So let's say you're paying yourself $100,000. You do a 4% match. There's another $4,000. So there's $31,000 you can put away and deduct as a business owner in one year.
00:20:58
Speaker
Then, under this design, the first layer of the cake is the employee contribution and the ketchup.
Profit Sharing & Contribution Flexibility
00:21:05
Speaker
That's the $27,000. The match is the middle layer of the cake. That's the 3-4%, depending on how you design your plan. We kind of walk people through that once.
00:21:15
Speaker
Once you want to move forward with that, we customize the 401k plan. There's lots of different things you can customize setting up your plan. Anyways, we can go walk you through that. The match is the middle layer of the cake. Then the third layer of the cake is what we call profit sharing. That's where you get to the end of the year. You've got a pile of cash. The business went well. You want to put more money away and get rid of it, squirrel it away.
00:21:37
Speaker
But the government, kind of like that set where you have to give a percentage to your employees if you do a percentage to yourself, that's how that third layer works, is you got to do it pro rata. So if you do a certain amount for yourself, you got to do that pro rata based on salary and age and everything for your staff. And our 401k companies kind of model all that out for you so you know exactly what's going to happen to the penny. But it allows you to put away about $0.70 on the dollar would go to the business owner. So if he says, I want to put in an additional
00:22:07
Speaker
10 grand in profit sharing, 7,000 that's probably going to go into his 401k and the 3,000 will get spread around the other employees. But those three layers of the cake can not add up to more than 67,500 in one year for that business owner.
00:22:27
Speaker
that three layer cake cannot add up to more than 67,500 if you're over 50. If you're under 50, it's only 61,000 because you don't have that $6,500 ketchup. Right. Okay, good. That's kind of the line in the sand for the 401k, the 67,500.
00:22:45
Speaker
Which it could be surprising for some business owners to be like, wait, you can put that much money in one of these retirement accounts? The answer is yes. You have to structure them correctly, but you absolutely can and we help a lot of business owners do that.
00:22:58
Speaker
Yeah, it's helpful. And with the match and with the profit sharing, if your limit is $67,500, the total that you're probably going to have to put into the plan is somewhere between, depending on your payroll and everything, it's probably somewhere between $75,000 and $100,000. Right. But $67,500 of that is going into your account, and you're deducting the full amount of all of that against your business income. So that's kind of the line in the sand there with the 401k. Good.
00:23:28
Speaker
All right. So what else do we can cover there? And then I think we need to go into the ice cream scoop on the birthday cake. I think the last thing I'd say as for the business owner that's really powerful is, and the employee side of this should know this too, to contribute to a retirement plan as an employee, the money has to go through payroll. So let's say you inherit like a quarter million dollars from a relative and you have it sitting in your bank.
00:23:55
Speaker
And you start working at some place in October. And you're like, hey, you're in the 401k. You have three months before the end of the year. And you say like, I want to put 20, let's just say you're over 50. I want to put $27,000 into the 401k before the end of the year to get the tax deduction, because I have all this money sent in my bank. You can't do that. It has to come through payroll. So what you could do is move your withholding up to like 90%.
00:24:22
Speaker
and withhold 90% of your salary into the 401k. And then if whatever you don't get there, you can put the rest in an IRA and deduct it that way.
00:24:31
Speaker
It would be a hybrid and then the following year, you would set your withholding to get up to the max of the $27,000 out of your paycheck, that type of thing. Anyways, my point is to contribute to a covered employer plan, you have to do it through payroll as an employee. As a business owner, you get to put money in the back door at the end of the year. Let's say it's 2022.
00:24:53
Speaker
It's January 2023. You're counting all the acorns you made. Let's say you're sitting on a million dollars cash. You had a really great year. And you say, I got to put some of this away. I want to put 100 grand into the 401k. You can do that in a lump sum for the tax year 2022. And we'll show you kind of a to the penny proposal of where that money will go. Most of it will go into yours. Then portion goes into the employees.
00:25:20
Speaker
but we can true up that three layer cake. So your employee contribution, let's just say you put in $1,000 a month over the course of the year through payroll, $1,000 a month. You got 12,000 in there, but your
Defined Benefit & Cash Balance Plans
00:25:33
Speaker
limit is 67,500. We can dump in that other money in 2023 for 2022 because you're the business owner. So it's very flexible in that sense of evaluating at the end of the year or post-year
00:25:48
Speaker
What you made what you want what you're gonna pay in taxes what you want to put away what you want to keep you know what you want to take out distributions all that stuff we can do on the back end. You know you don't have to do that through payroll so from that aspect of it it's a great planning tool to have a safe harbor 401k open.
00:26:08
Speaker
And vice versa, they'll say you have a terrible year, and you can only put a tenor and or, you know, some little amount, then you just do that too. But the plan is open for your employees and for you to put away that money. And every year you get to decide how much you dump in there. So it's it's a really great planning tool at your end for business owners to manage cash flow, taxes, you know, and and putting money away for yourself and diversifying out of the equity of your business.
00:26:35
Speaker
OK, that's good. All right, let's move on to the ice cream scoop. And let's probably caveat this by saying, this is for the business owner that's established. You're cruising. Yeah. You're cruising, and you know you're going to cruise next year, too, kind of thing. Things are going well, and maybe you're just getting railed with taxes, and you just need to try to put as much money away as possible. Yeah, go ahead.
00:27:05
Speaker
We kind of, you know, there's only really two types of money. There's now money and later money. So this cash balance pension plan, and there's a lot of different variations for this. There's like eight different variations of this, but in the majority, it comes down to most of the time the business owner is using a cash balance pension plan.
00:27:24
Speaker
And it's also can be defined as like a defined benefit plan. So a 401k is really called a defined contribution plan because you're putting the money in there. This is a little bit different. It's a defined benefit plan. You're, you're saying like us as a company is, you know, putting away a benefit for our executive. So think if like you worked at Costco and you know, they have a board of directors, they have all this formality at the C suite and running the business. It's not like a small business.
00:27:54
Speaker
And the guys making you know ten million dollars a year he doesn't need any more money but the compensation package to attract that guy. So hey we're gonna put three million dollars away a year into a defined benefit plan for you so that when you retire gonna have even more money. And you can do this as a small business owner too so but typically we're using this when you don't really like your now money is good like your house paid off your hands paid off.
00:28:20
Speaker
You've got the second home. There's just not a lot. The kids college has paid for it. You don't need any more cash flow out of the business. You want to put money away. Typically, we're doing this with people, I would say over 50, 55, maybe 45. Really in the mid 40s, most business owners, it seems like flip where, okay, I'm good. I've got the house. I got the car I want. Our kids are in school. I got the cash flow that I need.
00:28:46
Speaker
I want to start putting money away and I want to put more than six figures away for myself. We showed you with the profit sharing, the 401k, to max that out for yourself and especially if your spouse is in the business, it's going to cost you about 100 grand. If you're saying, I want to do more than that, you need to set up a defined benefit plan or a cash balance pension plan.
00:29:09
Speaker
We kind of call that in our analogy of the three layer cake. The three layer cake is the 401k. This is like the scoop of ice cream. You're at the birthday and they give you the obligatory scoop of ice cream next to your three layer cake. That's what this is. But it's really just a mechanism to put away a lot more money and discriminate against your employees, which typically sounds bad, but they're typically going to receive some money of this. It's just a higher percentage is going to go to you, the business owner.
00:29:36
Speaker
And so the key with these is you gotta contribute two out of five years, worst case. So you can't just like dump a bunch of money in and then shut this thing down. The IRS does not like that. And they just hired 87,000 more people. So these are like Phillips said, like you said, you gotta be seasoned. You gotta know your business is somewhat predictable. I know like going through COVID,
00:29:56
Speaker
That was a gut check and a checkpoint for a lot of business owners. I mean, we show a lot of business owners these defined benefit plans and now post COVID, they're just like, man, I don't know. I think my business is solid, but the whole world shut down. So yeah, there is that element to it of like, you've got to have cash. You've got to have cash flow. You're now money stuff is mostly taken care of, and you want to put away more than six figures a year for yourself or for you and your spouse if you're both in the business. And that's what the defined benefit
00:30:24
Speaker
plan does. The IRS essentially allows you to put up an additional $4 million a year is the limit that you can deduct. This is like IRA 401k money, traditional pre-tax. You're taking the deduction now. You're going to pay tax on the money later. We can invest the money in anything you want. So if you don't want more mutual funds or you want income guarantees or you want life insurance to protect your estate, there's lots of different things we can put the money in.
00:30:52
Speaker
So it's very flexible in terms of that and allows us to put away, like I said, basically six figures to $4 million a year for you and deduct it against your taxes. So that's kind of like mind blown. Some people like, wait, how much can we put away? So yeah, that's still something that you definitely want to reach out to. There's a conversation that need to be happening on that. So yeah. But I mean, you look at these companies, you know, like Amazon and Costco, I mean, these fortune, you know, 100, 500 companies.
00:31:21
Speaker
These numbers aren't crazy. There's a lot of big business out there and a lot of executives are getting paid. If you're running a company and your cash flow is moving up substantially, this is a great way to catch up for retirement too.
General Retirement Advice
00:31:35
Speaker
If you're 55 and older and some mistakes happened in your business, you got divorced, whatever, you had eight kids that went to private school.
00:31:45
Speaker
you paid for it like this is a mechanism that you can put away a ton of money in three to five years and really jack up your retirement if that's a goal of yours you know on top of or in addition to you know potentially selling your interest in the company other assets that you may have you know
00:32:04
Speaker
all that different stuff. So it's a great thing if you've had mistakes along the way or a bumpy road in business and now you're hitting your stride, kind of the Colonel Sanders, if you will, starting KFC, I think in the 70s. It's kind of like this is a great thing for those types of folks. And it's just a great thing if you're just businesses going well and you haven't had a bumpy road either. So anyways, okay, so we've covered a lot.
00:32:30
Speaker
And I really do think it's good to know and understand all of these things. And so what would we typically recommend people doing with their 401k as the employee or employer? What would you say? And I'll just tip my hand a little bit.
00:32:45
Speaker
normally say, hey, just get the match. That's something that you can do. It seems like a very no-brainer thing. At the end of the day, we all have goals and dreams and aspirations. And so it's just nice to diversify a little bit. You might as well get some money out of the deal. So if you put in 2%, you could match 2%. Or if the company matches 4%, try to stretch yourself and put 4% in there.
00:33:07
Speaker
Now, all the other uncommon stuff that we can do now if you have a really clear uncommon path, there'll be times we'll sometimes shut that off for a time. But at the end of the day, our normal recommendation is that you would at least get the match that your employee, no, employer, sorry, employer is going to give. That's normally a recommendation.
00:33:26
Speaker
What else would we recommend normal i think just in general not even financially related of like do this or do that just understand the plan you know me with a financial advisor doesn't have to be us.
00:33:39
Speaker
work with somebody if you don't understand it or start reading some blogs, ask HR. Just ask a lot of questions. Typically, there's a document you can get that explains your plan in the plan document. That's just kind of like all the variables that you get. It's like if you buy a new washer and dryer, they give you a little manual on what all the buttons do and settings. There's something like that for your 401K.
00:34:02
Speaker
And so whether you, if you don't understand, like go ask a parent or a mentor or a neighbor or a financial advisor, like just understand the provisions of the plan that you're in and then, you know, know if that's something you want to participate in. And then if you feel like money is super tight.
00:34:19
Speaker
and you can't participate in a plan to get the match, like Phillip's saying, then you probably need to work on your budget. And that's our shameless plug for Cube, but you've got to get on a budget. And the more you get on a budget and handle your now money, the more it allows you to put away for later money.
Transparency in 401k Fees
00:34:36
Speaker
So that would kind of be my book answer. That's good. Then I would want to say just public service announcement. The fees inside of your 401k are probably more than you think they are.
00:34:47
Speaker
Any 401k, like I just feel like everybody's like, oh, my 401k is so inexpensive to invest in there. And chances are the things that you're seeing are inexpensive, but there's always more fees. I shouldn't say always, always or never, but they're usually more fees that are associated with investing in a 401k that you don't see. So there's a public service announcement.
00:35:08
Speaker
Yeah, so how would you if you wanted to really dive in on that? What's the it's like fifty five hundred or something? Well, the fifty five hundred is a required tax filing document for a qualified plan So if you are in a safe harbor 401k, this is more to the business owner Your 401k has to have a tax filing and our companies provide that so it's not something you have to do or your accountant has to do like whoever
00:35:32
Speaker
whoever were hiring to do your 401k, they'd do that for us, for you. So that's all taken care of. But the document that you're referring to that lays out the explanation of all fees is what's called a 408B2. And you can request that from the advisor on the 401k or HR, the business owner, they're legally required to give you that. That's a fairly new thing in the last three to five years. And so I often don't see them a lot.
00:35:58
Speaker
And people don't know what to ask for, but that's what it is. It's a 408B2. It's a federal regulation that requires all retirement plans to have an explanation of all the fees.
00:36:08
Speaker
I would say fees are coming down in general. The fees over the last 5 to 10 years I think are getting compressed because people are more aware. There's more options out there.
Building Wealth & Conclusion
00:36:19
Speaker
We do see the fees in general coming down, but I think to your point, a lot of people think it's just free and it's really not free.
00:36:30
Speaker
Okay, so everything you needed to know about retirement plans. How do you like me now? They are a great tool to build wealth. You know, in our five star wealth article, it's the fifth point of the star. You know, for business owners, it's like your business, your home, money in the bank, you know, and then typically like commercial real estate or some other asset that enhances your business typically.
00:36:52
Speaker
and then a retirement plan. Those are the five main ways we try to show a business owner how to build wealth at the same time. And so you kind of hear, you know, the adage like, you know, most millionaires have six or seven streams of income. Well, that five point star covers five of them. And so that's kind of a way, this is like the book answer way to build wealth, give a benefit to your employees.
00:37:20
Speaker
and, you know, continue to keep growing and profiting from your business. Good. Okay. So we've said it a couple of times this podcast, if you are overwhelmed or having questions, reach out to us. We'd love to hear from you. Thanks for listening. Thanks for tuning in. We know that your time is valuable and we really appreciate it. So you've been listening to the Uncommon Life Project. I've been your host, Phillip Ramsey. And I am Brian Dewhurst. Until next time, go be uncommon. Thanks everybody. Goodbye.
00:37:49
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.