Small Business Tax Strategies

Smart small business owners save thousands of dollars per year on their personal and business taxes by taking advantage of the legal loopholes that the government creates for their unique tax situation. Small Business Tax Strategies cuts through tedious tax code to reveal the bonanza of completely legal opportunities to grow personal wealth and secure an enjoyable retirement.  Learn more about Small Business Tax Strategies and the two free reports you’ll get when you subscribe...

All of a sudden, the retirement nest egg you’ve been building all these years might not be enough. And you probably have less time left to make up for lost ground than most of your other employees. That’s especially true if you haven’t been able to max out on plan contributions in the past.

Strategy: Add an “age-weighted” feature to a profit-sharing plan. This feature allocates a higher percentage of plan contributions based on age.

Assuming you’re one of the oldest employees in the plan, if not the oldest, you can keep the bulk of the retirement benefits for yourself.

Here’s the whole story: The same rules that apply to regular profit-sharing plans generally apply to plans using the age-weighted feature. The plan can have a discretionary plan formula that provides more flexibility than usual, and you can even choose to skip contributions completely in a down year. Because the age of employees is factored into the formula, this type of plan generally favors older employees who have less time to accumulate funds for retirement than younger employees.

The contributions are calculated by using the present value of a single life annuity at a specified testing age. This ensures that the plan will meet the nondiscrimination requirements in the tax law.

Example: Age before beauty

Let’s say that you’re a 55-year-old owner of a small business that has five full-time employees besides yourself. The next oldest employee, who has been with you since the start, is 50. The rest of the employees are 40 or younger.

The total compensation for 2009 is $495,000. The company contributes $66,161 to the plan for the year based on a “testing age” of 65. Interest rate assumptions must be based on tax-law guidelines.

Also, note that special “top-heavy rules” require certain minimum contributions if more than 60% of the overall benefits go to key employees. Contributions are allocated as follows:

Plan payoff: As the highest-paid and oldest employee, you’re entitled to receive 60% of the total contribution to the plan for the year. Contrast this result with a traditional profit-sharing plan based strictly on equal percentages compensation. Since your compensation is roughly 40% of the payroll, you would be entitled to 40% of the annual contribution, or $26,731. The age-weighted plan provides you with an extra annual contribution of $13,269.

Tip: Another version of a profit-sharing plan that can benefit older workers is a new comparability plan. In this type of plan, the contribution percentage formula for one category of participants is greater than the other categories. 

 *Top-heavy minimum