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Keep working on your 401(k) account

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in Small Business Tax

Are you ready to hand over the business reins to the younger generation? If you’re like many small business owners, you may stick around in an advisory role.

Strategy: Max out on your 401(k). This will help you accumulate even more savings for retirement.

In fact, older business people can benefit from a special exception for required minimum distributions (RMDs).

Here’s the whole story: For 2017, you can defer up to $18,000 of salary to a 401(k), plus another $6,000 if you’re age 50 or older, for a total of $24,000. In addition, your company may provide matching contributions up to a stated percentage of salary. Typically, the match will equal 50% of the first 6% of salary deferred by an employee. Thus, the company match won’t exceed 3% of salary under this


Generally, other employees must be covered by the plan under the same formula, subject to the nondiscrimination rules of the tax code.

The pretax contributions made to your account are invested based on your choices from the plan offerings. There’s no current tax on earnings until you take withdrawals.

Of course, you must start taking RMDs from IRAs and qualified retirement plans like 401(k)s by the year after the year in which you turn age 70½. But this rule doesn’t apply to a qualified plan if you’re still working. To qualify for this exception, you must meet three requirements:

  • You must be employed throughout the entire year.
  • You can’t have more than a 5% interest in the business.
  • You must participate in a 401(k) that allows you to delay RMDs.

The 5% ownership requirement may be a stumbling block for certain small business owners. In that case, you might avoid RMDs by working for another employer.

Tip: This “still working” exception for RMDs doesn’t apply to IRAs.

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