Opinion: Forget the $22,500 limit, some workers can replace their tax-deferred retirement savings up to $265,000 by 2023

news7f10/31/2022

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Opinion: Forget the $22,500 limit, some workers can replace their tax-deferred retirement savings up to $265,000 by 2023

If you really want to increase your retirement savings and minimize income taxes, the best thing to do is to become a private practice professional late. As you earn a lot and close to retirement age, you have savings options that go well beyond that of a typical workplace 401(k) plan.

But you can also save more and reduce your tax burden if you’re a carpool driver, nanny or anyone with a side job. As long as you can handle some extra paperwork and some fees, you can set up a retirement plan alone and enjoy higher limits than most employees.

The The IRS recently announced the new maximum retirement contributions for 2023and most people focus on the amount of employee deferrals in a 401(k) plan, which would be $22,500, with an additional $7,500 for those 50 and older. For traditional IRAs and Roths, that’s $6,500, and an additional $1,000 to catch up.

You hit bigger numbers when you’re both an employee and an employer. For SEP IRA or solo 401(k) plan, designed for Schedule C filers for self-employment income, you can defer to the total allowable limit for both employees and employers, which will be $66,000 for 2023, plus $7,500 catch-up contribution. For cash balance pension plans, a defined type of benefit plan you can set up for yourself as an individual practitioner, the IRS says you can defer up to $ 265,000.

“Not everyone can save more for retirement, but if you can,” says Tom Balcom, a certified financial advisor who runs 1650 Wealth Management in Lauderdale-by-the-Sea, Fla. do this, it will increase the amount you can shelter., and the retirement plan user cash balance for his own retirement savings.

Higher limits for people with higher incomes

The reason you might have such a high limit on cash balance retirement plans is that they are calculated using a different system than the standard 401(k). A defined benefit plan focuses on the benefit amount and uses calculations based on the participant’s age and income to determine how much the contribution is likely to be during the year. So an older individual earning a lot of money can be more profitable than a younger person earning a starting salary.

If it sounds complicated, that’s because it is. You can’t do the computational calculations yourself, so you need to hire a third-party administrator at a cost of several thousand dollars a year.

Single entrepreneurs making this move often weigh in after going through several other plan options. They can start in their younger years with a plan with a lower deferred amount, and then switch as their age and income match the higher number.

Of course, most don’t start. Only 13% of self-employed people participate in a retirement plan compared with 75% of traditional workers, according to an analysis by the Pew Charitable Foundation.

Game over with a cash balance plan that doesn’t necessarily get an annual payout like you would with a pension. Your earnings accrue in an account like a 401(k) account, and most users plan to roll their money into an IRA in retirement and manage their accounts themselves.

“The flexibility to roll over to an IRA is great in the long term,” says Balcom. “I can cancel the way I structure the portfolio.”

Opening and maintaining a SEP IRA or solo 401(k) is a lot easier. For example, you can start a One(k) Plus plan at Ubiquity Retirement + Savings for $350, with a $35 monthly fee and recurring investment fees, says Chad Parks, founder and director CEO of Retirement + Popular Savings. You can also get these plans from most of the major brokers, like Fidelity, Schwab, and Vanguard, with features and costs that vary by provider.

For these plans, you can first contribute up to the maximum amount of $22,500 allowed as an employee, then you can contribute more as an employer. motion. For SEPs, that’s 25% of your net self-employment income up to the maximum combined limit of $66,000 for 2023. For a single 401(k), you can contribute all self-employment income. up to a maximum aggregate limit of $66,000 in 2023, so most of the times this counts as an amount higher than the SEP.

Sean Mullaney, a financial planner and CPA based in Woodland Hills, Calif. the author of a new book about solo 401(k)s. “The limits are per person, not per plan,” says Mullaney.

Mullaney calculates that it will take around $230,000 in Schedule C earnings to max out at a solo 401(k) in 2023. For those who apply for an S corporation, they can hit a maximum of $174,000. from W-2 income.

Even more tax benefits

Those who benefit the most from this approach earn above the 20% income cap. Eligible Business Income (QBI) Deduction, which was implemented in 2018 as part of the Tax Cuts and Jobs Act. That limit is $170,050 for individual filers and $340,100 for general file splitters in 2022.

“A lot of higher-paying professionals are left out of that job,” says Mullaney.

That’s where tax planning comes into play. If you defer income enough to get below the limit, you can get an extra 20% off your tax bill.

“The game becomes deduction, deduction, deduction while you are working,” says Mullaney.

There’s still time to reduce your 2022 income and plan to defer self-employment retirement before the end of the year. If you set up the type of plan you want now, you can make contributions for 2022 before the tax filing deadline and then you can roll over to 2023 with the new higher limits.