Maximize Your Tax Benefits for a 401(k) Plan with some not-so-well-known benefits

Whether you are an employer or employee, one of the most appreciated benefit of a 401(k) retirement savings plan is that participant contributions can be made on a pretax basis, effectively decreasing the income participants need to report to the IRS. In addition, retirement accounts grow tax-free until withdrawals are made.  Here are a few not-so-well-known tax tips that you and your team should be taking advantage of in 2017. 

For employers:

Tip 1: If you are establishing a plan for the first time, your company can receive a three-year tax credit for 50% of the startup cost, up to $500 per year. This tax credit can offset setup and administrative fees of the plan.

Tip 2: If you make an employer contribution to the plan, you can deduct it on the company’s federal income tax return.

For participants:

Tip 1: Saver’s Credit, also known as the Retirement Savings Contributions Credit, makes tax credits available to lower income individuals and households that contribute to qualified retirement savings plans, like a 401(k). The amount of credit depends on the adjusted gross income and the size of the contribution.   

Tip 2: Limits are reviewed every year and 401(k) contribution levels are adjusted annually using formulas based on Cost of Living Allowance Adjustment (COLA). This keeps the maximum contribution level on pace with inflation.

Tip 3: If a 401(k) plan allows (and most do), participants that are age 50 or over at the end of the calendar year are permitted to make “catch up” contributions, after the maximum regular contribution limits have been met. These contributions (up to $6,000) are not subject to the annual general limits that apply to 401(k) plans.

401(k) plans make a lot of sense if you’re looking to grow your retirement savings account tax free until it’s time to begin withdrawals. Keep in mind, throughout the various stages of retirement planning, there are some obvious and not-so-obvious advantages of a 401(k) saving retirement program that both employers and participants can, and should, take advantage of.

CoPilot is changing the conversations surrounding retirement. Talk to us about a CoPilot plan and we’ll help you maximize the tax benefits of a 401(k) retirement savings plan to help you and your employees build financial security. 

John Nahacky, JD, CPC - Compliance Manager - jenahacky@pai.com - 800-236-7400 x3250

John is the subject matter expert on 401(k) rules, regulations, compliance, plan design, and year end requirements.