The Benefits of Tax Planning: from Problem to Opportunity

What you don’t know CAN hurt you when it comes to taxes. Did you know that your retirement plan could be hiding a tax savings opportunity? Many business owners are required to offer a 401(k) plan to their employees, but they often miss out on the chance to optimize the plan for themselves and their employees.

In this blog post, we'll discuss a common scenario where business owners like you can significantly boost their retirement savings through strategic use of their 401(k) plan.

What is tax planning?

Before we get into the details, let’s define tax planning. Proactive tax planning is the strategic approach of minimizing your tax liability by legally and ethically optimizing your financial affairs. It's about making informed decisions throughout the year to reduce income taxes, capital gains taxes, estate taxes, property taxes, and more. By taking a proactive stance, you can potentially save a substantial amount over your lifetime. It should be done before the first of the year.  For more details on creative tax planning strategies, check out this podcast episode.

The Missed Opportunity

Let’s get into some specifics using Tom and Nancy, owners of a large grocery store chain as an example. They had implemented a 401(k) plan for compliance purposes but didn't receive guidance on how to best leverage it strategically. They also were unaware of the impact it had on their ongoing IRA contributions.

Here's the key point: In 2024, individuals over 50 can contribute up to $23,000 per year to their 401(k), with an additional $7,500 catch-up contribution. This means Tom and Nancy could have been saving a combined total of $61,000 per year in pre-tax dollars!

The Impact on IRAs

There's another wrinkle to consider. Because Tom and Nancy had such low contributions to their 401(k), their IRA contributions for 2023 were not tax-deductible due to their high income. Due to IRS regulations, they could not withdraw the contributions or lose the deduction. Instead, their IRA contributions for 2023 would have to be treated as non-deductible.

They faced a complex decision:

• Should they keep the non-deductible IRA contributions: They could potentially use a backdoor Roth conversion strategy later. However, this is complex and might not be optimal for their situation.

The Tax-Friendly Solution

The good news is that Tom and Nancy didn't have to resign themselves to missing out on tax savings. By prioritizing maximizing their 401(k) contributions in 2024, they could make significant tax savings. While their 2023 IRA contributions would be non-deductible, the long-term benefits of maximizing their 401(k) outweighed this.

In their situation, maximizing their 401(k) contributions resulted in an estimated tax savings of $28,000 in 2024 alone!

Don't Miss Out on Hidden Tax Savings

Just like Tom and Nancy, many business owners are missing out on valuable tax savings opportunities within their retirement plans. If you're a business owner with a 401(k) plan, it's crucial to consult with a financial advisor to ensure you're maximizing your contributions and taking advantage of all the tax benefits available.

Schedule a Free Tax Analysis Appointment Today

Our team of experienced financial advisors can help you identify hidden tax savings opportunities within your retirement plan.  Schedule a free tax analysis appointment today and let's discuss how we can help you reach your retirement goals.