In the past, most people relied on two principal sources for their retirement income: Social Security and employer sponsored retirement plans.
The concerns relating to the long-term financial viability of Social Security are well documented. You may have heard the comment “Social Security won’t be there when I retire.” Even under current circumstances, retirement benefits from Social Security will average only about 25 to 45 percent of pre-retirement income, and this percentage, will be substantially lower for those with higher income. In addition, federal tax law limits the amount of contributions and benefits provided with qualified retirement plans, particularly for business owners and “highly-compensated” employees.
What does this mean? Total retirement benefits from Social Security and qualified plans may be less than desired by those who are taking the initiative to save. As a result, both employees and companies recognize the need to develop creative and effective plans to provide additional retirement savings.
There are several qualified plan options a business owner can consider if they are interested in saving more than they can in a traditional 401(k) plan. Some unique solutions allow for saving up to $67,500 per year, with the same tax benefits received in traditional 401(k) plans. Other defined benefit pension plans allow for saving several times that amount, under the right circumstances. The amount you can save is calculated on the demographics of your plan. Factors include number of participants, their age, and length of employment. By reviewing your plan demographics, we can let you know which options and amounts are available to you.
Another option to consider is a 401(k) Overlay Plan. This is available to any business who wants to offer employees a way to save for retirement on a tax-preferred basis. The tax benefits are not quite as significant as the options mentioned above, but this plan has a lot more flexibility. For example, the employer may choose to only make the plan available to a few key employees. It can be tailored to meet the objectives of both the company and its key employees.
Don’t make the mistake of hitting the traditional 401(k) ceiling and giving up! In many cases, the ceiling will not allow you to save enough money to continue to live the lifestyle you are accustomed to in retirement. There are ways to save above the traditional limits and enjoy the tax benefits so you can build a nest egg with enough money to meet your retirement goals.
If you find yourself hitting the ceiling on your contributions to your retirement plan, contact one of the advisors at Independence Financial. We will help you review your company plan and inform you of your options for saving additional retirement funds on a tax preferred basis. Independence Financial has been specializing in retirement planning for over 90 years. (920) 236-6587
About the author: Glenn Nelson is a Lead Financial Advisor with Independence Financial. He specializes in 401(k) and non-qualified retirement plans and has been helping individuals and small business owners reach their retirement goals for over 35 years.