As a small business owner, you may find yourself in an extremely unique situation to maximize Roth savings. This is especially true if you are an owner only business. Retirement plans fully covered under the Employee Retirement Income Security Act have additional complexities that a third-party administrator (TPA) can help you manage.
The table below shows you many savings scenarios, but not all, depending on marital status, age and whether you’re phased out by income. I’ll clarify the table’s columns referring to line 2. You may need to scroll the table to see all of the data. Employer Max refers to the fact, that as an employer you can receive/save $66,000 in total contributions if you have qualifying income. You as employee, can defer/save $22,500 in Roth 401(k) savings. That leaves $43,500 for you to add as employer with qualifying income. Note that employer contributions are made pre-tax. Fifty plus savings, indicates that, because you are over fifty, you can add catch-up savings of $7500 to the $22,500. Not switching to the Roth IRA. You can make too much money and be phased out of making a contribution. The 2023 income phase-out for range single filers and heads of household is between $138,000 and $153,000 (married filing jointly, $218,000 to $228,000.)
Line 1 shows that in 2023, a Roth 401(k) allows you to make a Roth contribution of $22,500 if you have earned income of over $22,500 to account for state and federal withholding. While there is no income phaseout for the Roth 401(k), there are income phaseouts for the Roth IRA. If you’re under 50 and your Modified Adjusted Gross Income is less than $138,000 you can also make a Roth IRA contribution of $6,500. That’s a combined total of $29,000.
Line 2 shows that as you are over fifty you get to add $7,500 to the standard Roth 401(k) contribution of $22,500 for a total of $30,000. You can also add $1000 to the Roth IRAs $6500 or $7500. This grand totals to $37,500.
Line 3 shows the opportunity for under fifty, Married Filing Jointly, MAGI under $218,000 assuming the spouse does not work in your business. The Roth 401(k) amount stays the same but the Roth IRA opportunity doubles to $13,000. This totals to $44,000 for the household.
Line 4 shows same facts except both of you are over fifty. That adds an additional opportunity of $2000. Now, let’s see what happens if the spouse works in your business. This totals to $45,000 for the household.
Line 5 shows the opportunity for under fifty, Married Filing Jointly. Roth 401(k) allows your spouse to also make a Roth contribution of $22,500 if their income through your business is at least $22,500 to account for state and federal withholding. That increases the household Roth 401(k) savings to $45,000. For Roth IRA purposes, the Modified Adjusted Gross Income phaseout increases to $218,000. If you qualify the Roth IRA opportunity doubles to $13,000.
Line 6 shows same facts except both of you are over fifty. That adds an additional opportunity of $17,000, $2000 Roth IRA and $15,000 Roth 401(k).
In a prior article, I explained that contributions to a 401(k)-profit sharing plan are made up of employee deferral savings and employer contributions. The employer contributions can be thought of as profit-sharing. The maximum employer contribution is $66,000 for an individual. If your spouse is on the payroll, there is a potential that they may qualify for the same, doubling the household opportunity to $132,000.
Do you really need to save that much? That depends on how much you want to live on in retirement and how much you want to pass on to heirs. I recommend working with a financial advisor with credentials like Chartered Retirement Planning Counselor or Certified Financial Planner to help you personalize your needs and run the calculations. You may have spent years trying to get the business going and now need to boost retirement savings. As you can see, the Roth 401(k) offers a hefty opportunity itself. Adding the Roth IRA offers even more catch-up opportunities.
The Roth 401(K) allows you to simply save $66,000 simply using the employer, you, profit-sharing opportunity. That means that all the money would be saved pre-tax. That means that you would be facing paying taxes by the mandated required minimum distributions starting at age 72. Many people are surprised to find out that they either must make withdrawals or how much they will have those withdrawals taxed. Not withdrawing the funds, subjects you to a 50% penalty.
Through tax planning you and a tax planning advisor may find some opportunities to help you qualify. For example, if you’re phased out of a Roth IRA, you may be able to alter that by switching your 401(k) savings from Roth to traditional. That may allow your MAGI income by saving your employee contributions to pre-tax. You can subsequently convert that contribution in the future using a Roth Conversion. To learn more about Roth Conversions, click here.
It’s best to find a collaborative team of tax planners, such as Certified Public Accountant, Enrolled Agent, and Certified Financial Planner, to find the right strategy for you. Tax savings strategies are much less risky than investing, with potentially much higher payoffs. Hope this info helps you boost your Roth savings.