Guest Post: Retirement Plans – Employer Decisions

Hey everyone! Have a special guest post today.

Henry Preston is the founder of Veteran Wealth Planning, where he works with high-earning veterans.

Let’s see what he has to say:

Disclosure: The information contained in this article is for educational and informational purposes only and does not constitute financial, investment, or legal advice. Any references to specific securities or investments are for illustrative purposes and do not constitute a recommendation to buy, sell, or hold such securities. Readers should seek their own professional advice before making any investment decisions. The author and their firm are not responsible for any loss or damage resulting from any decisions made based on the information provided in this article.

Retirement Plans – Employer Decisions

We’re not talking about buying a boat or a house in the mountains, we’re talking about your business’s retirement plan.

As an employee, your choices matter. As an employer, they’re magnified, and you owe it to your family and employees to get this right.

To Plan or Not to Plan.

“My accountant told me to spend $100k before the end of the year or I’m going to lose it in taxes, so I traded in two of my 2022 work trucks for new ones. Probably could have gotten a few more years out of them but I’d rather get something than pay it in taxes.”

Yup, actual statement from a small business owner right there.

Not having an employer sponsored retirement plan is nearly inexcusable if your business is profitable.

Why?

Because employer contributions to retirement plans are a tax-deductible EXPENSE that benefits the business and its owners.

The business gets a deductible expense while improving employee retention through a more generous compensation package, and the owner gets to defer more profit into their own retirement account, generally deferring taxes in higher earning years.

This specific business owner did not have a retirement plan for his company, so he went and prematurely bought new trucks that will not create lasting value for his family. And this wasn’t the first time his accountant had told him to spend it or fork it over in taxes.

With a properly structured profit-sharing plan, he could have contributed up to $70k to his own retirement account, and the same amount to his wife’s since she worked in the business.

Changing course is hard, buying new trucks every year is easy. I know which one I’d choose.

So if you’re a business owner, what options do you actually have? There are two broad categories of retirement plans that we will discuss: Defined Contribution and Defined Benefit.

Defined Contribution.

Remember your TSP?

Your TSP is a defined contribution plan, and here’s a brief summary of other common plans and typical use cases:

• Profit Sharing Plans – Very flexible, aligns incentives, high contribution limits

• 401(k) – Employers of any size, fairly standardized, high contribution limits

• 401(b) – A 401k for non-profits

• SEP IRA – Only the employer contributes, everyone receives an equal % of their salary, flexible, super low administrative cost, great if you only have a few employees

• SIMPLE IRA – For the employer who wants to say they have a retirement plan but doesn’t want to help their employees much

There are some other variants that solve very specific challenges, like multi-generational ownership, but these are probably the most common ones.

Having a defined contribution plan in place is a pretty mature thing to do as a business owner.

But most small business owners don’t do enough research before selecting their plan.

As the owner, you get to pick the retirement plan the company implements. And you get a say in how it operates. Within IRS and ERISA guidelines, there are plenty of ways to ethically and legally put an employer-sponsored retirement plan in place that first and foremost benefits the owners.

Not many employees max out their 401(k) each year. Owners on the other hand……

Wait, hold up! Business owners are enriching themselves?! How dare they!

Here’s the deal…..employers who want the most favorable tax treatment for their retirement plans have to give something to their employees in exchange for maximizing their own benefits.

That’s why most retirement plans have an employer match! Guess what a suitable match enables the employer to do? Fill their own tax-advantaged accounts.

Now what happens if an employer’s retirement plan doesn’t treat rank and file employees fairly? Well hopefully it doesn’t come to that, because the whole plan could lose it’s tax-advantaged status, and that puts a real damper on the holiday party.

If you’re wondering why these are called ‘Defined Contribution’ plans, it’s because the annual contribution amount is limited. The amount these accounts can grow and distribute is not limited.

The i401(k)

Before we move on from Defined Contribution plans, I wanted to call out a specific type of 401(k) plan, the i401(k), and do a bit of math to show how powerful just a little bit of tax planning can be.

You probably know that in 2025 the maximum employee contribution to a 401(k) plan is $23.5k. Many employers provide a matching contribution around 5%. But a 401(k) plan can be a profit-sharing plan, meaning that the employer could contribute more.

How much more?

Let’s get back to the i401(k). These are sometimes called an individual 401(k), solo 401(k), self-employed 401(k), one-participant 401(k), solo-k, etc. Here are some key points:

• A Solo 401(k) is designed for business owners with no employees (except a spouse)

• Follows the same rules as a traditional 401(k)

• You can choose Roth or pre-tax contributions (or a mix of both), depending on your tax strategy

• In 2025, total contributions (if under age 50) are capped at the lesser of $70,000 or total compensation

• Earned income for self-employed business owners is calculated differently, it’s net earnings minus ½ self-employment (SE) tax minus plan contributions

Yup, provided you earn enough, and the business has enough profits to share, you could end up with a $70k annual contribution.

Employees rarely max out contributions, but as an employer, you can double-dip, contributing as both employee and employer.

• Employee: Defer up to $23,500 (or 100% of compensation)

• Employer: Contribute up to 25% of compensation (or net SE income)

Depending on your business structure, the contribution limits and calculations can move around a bit, which is why business entity choice and retirement plan selection are intertwined with financial planning for business owners.

For business owners earning less than ~$250,000, a Solo 401(k) often allows for higher contributions at lower incomes than a SEP IRA.

Why does this matter? Because plans like this let small business owners save more (and sometimes smarter) than most employees ever could.

Defined Benefit Plans.

Your dad probably had one of these when he worked at General Electric, Raytheon, Ford, or just about any big company in the 1970s.

And if you did 20 years in the military, you have one too!

Commonly known as pensions, these plans focus on the amount of payout that employees receive rather than the amount that is paid in.

The defined payout for each employee is usually determined by combining their eligible years of service and highest earning years. Wait this sounds really familiar, doesn’t it?

Almost like the military’s high-3 system?

The employer is then required to fund the plan with whatever contribution will support this defined benefit. Actuaries are hired to determine funding, and the amounts can vary significantly based on factors like life expectancy, expected market return, expected tenure, and salary.

You also probably know pensions went out of style because the funds required to sustain them ballooned when employees unexpectedly started living longer.

Few corporations still offer new employees access to defined pension plans, but they can still be a great tool for small business owners who are a bit older.

Let’s say a mom-and-pop accounting firm is generating massive profits but the owners only have 3 more years until retirement. They have a few employees, but those employees are much younger and have high turnover.

With a defined contribution plan, Mom and Pop would be limited to $70k retirement plan contributions per owner, plus a $7,500 catch-up contribution if they are over age 50. So that’s $155k total they could count against their taxable income in 2025 (there are some other catch-up provisions but let’s keep this simple).

But what if their profits dwarf that and they want sizable deductions that also increase the retirement savings they will be living off for the next 30 years?

With a defined benefit plan, the contribution limit goes out the window and it’s the benefit that is measured. In 2025, the maximum defined benefit payout is $280,000 per recipient.

You’re smart, do the math and tell me what the required contribution would have to be over three years to support two pensions of $280,000 for the rest of their life?

If your guess is around $2MM per year, then you’re broadly right.

That could mean a $2MM deductible business expense for each of those last three years before retirement. Not bad, huh?

Now, defined benefit plans are a pain in the ass to administer and way more expensive than a defined contribution plan, but there are certain instances when they can be awesome and create huge tax savings.

Bringing it back.

I get it, life gets crazy as a business owner, and often we focus so much on the thousand tasks at hand that we forget to step back. Putting a retirement plan in place probably wasn’t in your business plan, and now you’re too busy to figure it out.

But the right plan could save you a fortune in taxes while helping you build wealth for yourself and your employees.

I don’t manage retirement plans, I don’t sell them, and I’m agnostic as to which plan sponsor you choose. Hell, I don’t even bill on the assets my clients have in their retirement plans. But I still work with my business owner clients to incorporate the right retirement plans into their long-term vision, because its really impactful.

Whether it’s an i401(k) for a married couple with no employees, or a new comparability profit-sharing plan for owners with a large age disparity, there are plans worth evaluating that might be just right for your business.

This is an excerpt from my free weekly newsletter, written specifically for high-earning young Veterans with MBAs. You can also follow me on LinkedIn, where I nerd out on topics like tax planning, estate planning, insurance planning, and overall financial planning.

Please use what I write to educate yourself and lead a more fulfilling life.