401(k) New Year’s Resolutions

The New Year is an opportune time for business owners and individuals alike to reflect on their financial strategies, particularly when it comes to retirement planning. From ensuring plan compliance with changing business structures to considering Roth accounts and preparing for potential audits, financial advisors Colin Day and John Biedenstein discuss what anyone looking to optimize their retirement plan can look at to start the upcoming year.

For recent investment news and our take on the current market, retirement planning, and investment, listen to our podcast Capital Conversations or view our recent blog posts. Below is a transcript from this episode, "401(k) New Year’s Resolutions.”

Colin Day: Hi, everyone. Welcome back to another Capital Conversation. I'm Colin Day, Certified Financial Planner Professional. With me again is John Biedenstein. John, how are you since the last 20 minutes when we chatted last?

John Biedenstein: I am wonderful. And we're coming up to a new year.

Colin Day: We are. This particular podcast is probably going to come out right before the end of the year. John, question is. Do you have any New Year's resolutions?

John Biedenstein: Well, I probably have the old, you know, you could lose a little bit of weight kind of thing. There's other things I'd like to mention too, but what's yours?

Colin Day: One is to get my family's situation better off and what I'm referring to is the tree that hit my house and my son who is displaced and my fingers are crossed that by the time this podcast comes out, the carpet is installed in his room so he can move back into his bedroom before the new year. That is my hope heading to the end of the year. But going into 2024, it's continuing to do this job and do this job well, I hope. Making sure that everybody graduates the grades that they're supposed to graduate from from the kid perspective and everybody's happy and healthy, right?

This particular conversation I wanted to have again with John was in regards to our 401(k) plans So speaking about business owners, people that are interested in either developing retirement plans or that have retirement plans at their jobs. What are some of the New Year's resolutions that we hope that they have in regards to their retirement plans? So John, if you're in a business owner's seat and you were thinking about the type of New Year's resolutions you want specific to your retirement plans, where would you start?

John Biedenstein: Well, retirement plans are their own little beast and you need to keep them under control. For example, if there's certain things that happen within your business, you have to think of it from the perspective of, “Does this impact our qualified plan?” For example, we work with 40 or so employers. Two of them recently, one of them called me and we had a conversation in regards to, they've recently made a little bit of a change in ownership where one of the senior employees is now becoming an owner of the business. That's a great thing in the first place, but in the second place that impacts your qualified plan. And the testing that's needed in regards to the qualified plan and how you categorize employees.

We have another one of our contractor companies that I work with. They have recently called me and said, “We've had a change in regards to our corporate structure.” We operate a number of different companies that are all participating employers under their plan. And they've created a new employer – based on more of a legal situation – but that requires that again, the plan be amended to add that new participating employer.

We run into situations where people have been very successful in their career and we all should come to a point – these are called “retirement plans” – and at some point in time, some people do retire.

Colin Day: Yeah, go figure.

John Biedenstein: For example, if you're a trustee of the plan and you retire, you probably don't want to be a trustee anymore. You'll let somebody else fill that role. So these are kind of year end things, things that might've happened at or around the end of the year or maybe early in the next year that you'll think ahead and think, “Hey, maybe that might impact the retirement plan and we should do something about that.”

Colin Day: Yeah. So if we were to sum that up, let's call it a “401(k) cleanup.” You should look at your plan documents, making sure that everything is listed the same. Has your business name changed? Again, change of ownership structure, different names that need to be associated with the plan. I think it's a great place to start as you head into the new year.

The thing that I would like to talk about is maybe the second New Year's resolution are Roth accounts. So, Roth in your 401(k) has been around for close to 20 years now, but we still run into retirement plans that don't offer Roth.

John Biedenstein: Saw one today.

Colin Day: There you go. We run into plans occasionally that don't have Roth. And if you're not familiar, Roth is just another deferral source. So, “Hey, I don't want to contribute on a pre-tax basis to my retirement account. I wish to contribute on an after tax basis.” So, giving your employees that option is important.

And, in fact, you might take it one step further and say, “Hey, John, this might actually become mandatory.” Some of you might be familiar with the provisions of the SECURE Act 2. 0, which was passed at the end of last year in 2022. With that act came some additional fund provisions that, unfortunately, are going to impact people perhaps negatively. And this is referring to catch up contributions. Because this is gonna be indexed for inflation I'm not gonna say any particular numbers here. But ultimately, if you're a higher wage earner within your employer, if you're of a certain age where you're eligible for the catch-up. So if I am 50 or older, heading into 2024, and I make over a certain dollar amount, I now have to make that catch-up contribution on a Roth basis.

Now, there's a big asterisk there because this isn't – well it’s technically something that should have gone into play in 2024. This is being kicked down the road, unfortunately, because record keepers need to suddenly say, “Ah, hold on, we need time to be able to program this into our softwares.” So we're in a situation where sometime, likely in 2024, maybe gets pushed back a year or two but it will become mandatory to offer some kind of Roth deferral source. So if that is not a part of your retirement plan, if you're only offering a pre-tax contribution and allowing your employees to defer, you have to have a Roth deferral source going forward. So, again, something to talk about with your advisor, with your plan representative at your 401(k) plan, making sure that you've got that in play.

The third thing that I'd like to talk about is, John, we just went through a major audit season, right? Many of our plan sponsors had audits on their 401(k) plan. It's just a natural thing that happens that is required. And you might have had a negative experience doing it because the audit requirements maybe were a little bit more detailed than in previous years.

So, how do we course correct for that? Well, why don't you spend that opportunity that you have maybe heading into the new year where you're not underneath an audit to make sure that you're prepared for the next one. So, if you went through an audit recently and you had to run certain kinds of reports, maybe you had to pull certain kinds of files, work with your payroll or your bookkeeper to find more information, use this as an opportunity to start to put together the playlist for how you handle this next year or in a future year. Because if you've gone through an audit, John, I don't know about you, if you've gone through an audit, you might not want to do audits forever.

John Biedenstein: Correct.

Colin Day: Maybe you're an employee that would rather have another employee do that. And if that's the case, if you want to push these duties to somebody else, why don't you set them up for success? Why don't you create a PDF, or just a working document or spreadsheet? A checklist that says, “Hey, these are the steps that you need to follow through.” We do some internal videos in the office. “Hey, if you're going to do this kind of procedure, this is how you do it on this website.” If they need to pull up a census report on Fidelity. “Hey, here's a video of how to do that, new person that's never done this before. So you don't have to annoy me. You can figure this out on your own.”

Try to automate this. You just went through this experience, you probably understand exactly where to find this information. Use this as an opportunity to simplify your life in the future. Because, I don't know about you, John, but if I'm doing something only once a year, I forget it within a few months of going through the process.

John Biedenstein: Yeah. And I'm not justifying the auditor's existence or the auditor's duties and responsibilities, but I am aware that their requirements changed over the last number of years and they have to ask for even more than they had to a number of years ago.

So it is a little more painful going through that process. One of the things that we've seen, they're called pooled employer plans and they're called multiple employer plans, where basically you can move to one of these multiple employer plans or MEPs, and rather than your individual plan being audited, you move to a plan and you get out of the audit business because the MEP is the one that gets audited.

Colin Day: Right, because there's a bigger structure above you now that sponsors you.

John Biedenstein: Correct. Right. So, ABC company might, for all intents and purposes, merge their plan and move it into ABC Company MEP. ABC Company MEP gets an audit and again, multiple employers are involved there. The construction industry is a perfect example that has multiple employer plans. There's one audit done on that multiple employer plan that might have seven to 10 contractors involved with it. They're not going back to each of the seven to 10 contractors and going through an individual plan audit. So not only time savings, but you're not paying seven to 10 audit fees. So it can be much more cost effective in regards to those types of structures than others.

Colin Day: Right. Exactly. Something else to think of there is again – because everything is changing, life gets harder with when it comes to just running and administrating your retirement plan every year. One of the things that affects you personally as the business owner, maybe you've got employees that are trying to max out your contributions. So another thing that we would want for you all as a New Year's resolution is to check how much you're contributing. Because guess what? Contribution limits increase in your retirement plans. So in a 401(k) plan that you're deferring into, if you're under age 50 for this year, you have an extra 500 bucks that you can contribute. So instead of $22,500, you can contribute up to $23,000 now. The catch-up limit is still the same, so that's $7,500.

But if, say, you're 55 years old and you wish to max out your 401(k) and you contributed $30,000 this year, well, make sure you adjust your pay stub so that you get the extra $500 deferral in there. Or, again, if you're under age 50, going from $22,500 to $23,000. But that's often an overlooked thing to just believe, “Hey, I'm contributing the maximum year over year.”

And then we look underneath the hood of your pay stub and I realize, “No, you're doing the deferral limit from 2008. Did you know these things go up occasionally?” So there's [a] missed opportunity for folks. So again, a New Year's resolution for you all is to make sure that you are adjusting your deferral limits.

So John, why don't you wrap it up with your last idea about, hey, maybe you're a business owner and you realize, “Oh, we had maybe a better year than we thought, and I'd like to find some tax savings, please.”

John Biedenstein: Yeah. Correct Capital is fortunate to work with – I mentioned earlier – about 40 different plans, but we also work with very successful family businesses. Some of them just have personal wealth with us, but a number of weeks ago, I met with a couple that have had a number of years of being very successful and have quite a bit of profit to play with this year. So the conversation has gone from, we used to have a Simplified Employee Pension or a SEP plan, but should we be establishing a profit sharing plan? This is an employer only funded plan where we can put you know, a lot of money into that and – don't take it this wrong Uncle Sam – but pay Uncle Sam a little bit less.

Colin Day: They’ll pay later, let’s be clear.

John Biedenstein: Pay later.

Colin Day: It’s called tax deferral.

John Biedenstein: Qualified plans are permanent. You can't establish one and then a year later terminate it. You're going to get in trouble if you do that. But you can establish a profit sharing plan that has a discretionary contribution, meaning that you have the discretion to make the contribution when your profits allow. If your profits don't allow, you're not required to make a contribution. So that type of structure could be a very good fit for small family businesses. Particularly, the situation I have, it's four or five, 10 employees, three of which were family members. So the lion's share of some of those contributions can be weighted towards certain people. It's a benefit, especially in situations where you've got some of the money to be able to afford making these contributions. Take advantage of it.

Colin Day: So again, if you're heading into next year and you're starting to collect your numbers with your bookkeeper, your CPA, and you're realizing, “Eh, okay, maybe there's an opportunity here for me to do some tax deferral, to do some current year tax savings,” again, cause we're just deferring it. We have to pay taxes eventually, unfortunately. But if we can defer it to maybe a lower income year or in retirement, then it behooves us to entertain those options.

So, with all those ideas, we talked about it quite a lot. If you have questions about your retirement plan and what you're up to, feel free to give us a call. We're happy to have a conversation with you. I said this in the previous video and podcast, we're very fortunate that we do get quite a few interesting emails every once in a while from employers that are trying to improve their benefits for their employees or just again do tax deferral for themselves.

We love those opportunities because every employer is different. Every group is different. They're striving for different things. So if you think that you need some help, feel free to reach out to us. So John any parting words?

John Biedenstein: Happy New Year!

Colin Day: Happy New Year! Wonderful. Thanks John. Appreciate it.

John Biedenstein: Thank you.

Colin Day: All right. Thanks everyone. We'll see you in the next Capital Conversation.

The opinions expressed in this program are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. It is only intended to provide education about the financial industry. To determine which investments may be appropriate for you, consult your financial advisor prior to investing.

As always, please remember, investing involves risk and possible loss of principal capital. Please seek advice from a licensed professional. Correct Capital Wealth Management is a registered investment advisor. Advisory services are only offered to Clients or prospective clients where correct Capital Wealth Management and its representatives are properly licensed or exempt from licensure. No advice may be rendered by correct Capital Wealth Management unless a client service agreement is in place.

Capital Conversations by Correct Capital Wealth Management

If you're a business owner or someone responsible for managing a retirement plan, the start of a new year is the perfect time to reassess and refine your approach. Correct Capital is here to assist you in navigating the complexities of 401(k) management and ensuring that your plan is both compliant and optimized for tax purposes and efficacy. Whether you're looking to update your plan's structure, explore new contribution options, or prepare for an audit, our financial advisors can provide tailored advice and solutions. Reach out to us today to start your 401(k) New Year's resolutions on the right foot and ensure the financial well-being of your business and employees. Call us today at 877-930-4015 or contact us online to get started.