As a small business owner, you may find yourself in an extremely unique position to maximize your Roth savings. This is especially true if you are an owner-only business. Retirement plans fully covered by the ERA have additional complexities that a Third Party Administrator (TPA) can help you manage.
The table below shows you many, but not all, savings options, depending on marital status, age, and whether you’ve been eliminated by income. I’ll clarify the table columns for row 2. You may need to scroll the table to see all the data. Employer Max refers to the fact that as an employer, if you have qualifying income, you can receive/save $66,000 in total contributions. As an employee, you can defer/save $22,500 in Roth 401(k) savings. That leaves $43,500 for you to add as an employer with qualifying income. Note that employer contributions are pre-tax. 50 Plus Savings means that because you are over 50, you can save an additional $7,500 on top of $22,500. Do not switch to a Roth IRA. You may have made too much money and been eliminated from contributing. Single filers and heads of household earn between $138,000 and $153,000 in the 2023 range ($218,000 to $228,000 for married joint filers).
Line 1 shows that in 2023, if your income exceeds $22,500, a Roth 401(k) allows you to make a Roth contribution of $22,500 to cover state and federal withholding taxes. While a Roth 401(k) has no income knockout, a Roth IRA has an income knockout. If you’re under 50 and your adjusted gross income is less than $138,000, you can also contribute $6,500 to a Roth IRA. Total $29,000.
Line 2 shows that when you turn 50, you can add $7,500 to your standard Roth 401(k) contribution of $22,500 for a total of $30,000. You can also add $1,000 to a Roth IRA of $6,500 or $7,500. The total is $37,500.
Row 3 shows the chances of being under 50, married filing jointly, with a MAGI of less than $218,000, provided the spouse does not work in your business. The Roth 401(k) amount remains the same, but the Roth IRA opportunity doubles to $13,000. The total household income is $44,000.
Row 4 shows the same fact, only you are both over 50. This adds an additional opportunity of $2000. Now, let’s see what happens if a spouse works for your business. The total household income is $45,000.
Line 5 shows the opportunity for married filing jointly under the age of 50. A Roth 401(k) allows your spouse to contribute $22,500 to Roth as well, provided they earn at least $22,500 from your business for state and federal withholding. This increases the family’s Roth 401(k) savings to $45,000. For Roth IRA purposes, the revised adjusted gross income is phased out to $218,000. If you qualify, your Roth IRA chances double to $13,000.
Row 6 shows the same fact, except that you are both over 50. This adds additional opportunities for a $17,000, a $2,000 Roth IRA, and a $15,000 Roth 401(k).
In a previous article, I explained that contributions to a 401(k) profit-sharing plan consist of employee deferred savings and employer contributions. The employer’s contribution can be thought of as profit sharing. The maximum employer contribution for an individual is $66,000. If your spouse is on the payroll, they may be eligible for the same salary, doubling the family opportunity to $132,000.
Do you really need to save that much money? It depends on how much you want to live in retirement and how much you want to pass on to your heirs. I recommend working with a financial advisor with qualifications such as a Chartered Retirement Planning Advisor or Registered Financial Planner to help you personalize your needs and make the calculations. You’ve probably spent years trying to get your business going and now need to increase your retirement savings. As you can see, the Roth 401(k) itself presents a huge opportunity. Adding a Roth IRA provides more catch-up opportunities.
A Roth 401(K) lets you save $66,000 just by using the employer, you, and profit sharing opportunities. This means all the money will be saved before taxes. This means that you will be taxed on the required minimum distributions starting at age 72. Many people are surprised to find out that they either have to withdraw their money or how much tax is imposed on those withdrawals. You will be penalized 50% for not withdrawing funds.
Through tax planning, you and a tax planning advisor may find opportunities to help you qualify. For example, if you’re phasing out of a Roth IRA, you can change that by switching your 401(k) savings from Roth to traditional savings. This increases your MAGI income by putting your employee contributions into tax. You can then transform that contribution in the future using Roth transforms. To learn more about Roth transformations, click here.
It’s best to find a collaborative team of tax planners, such as a CPA, a registered agent, and a certified financial planner, to find a strategy that works for you. Tax-saving strategies are much less risky than investing, and the rewards can be much higher. Hope this information helps you increase your Roth savings.