Profit sharing plans can be a big deal for successful business owners. Many successful business owners will use profit sharing plans because it has a big impact on their financials in multiple different ways, especially among more white collar business owners that have been successful is. Think of doctors, lawyers, dentists, therapists, chiropractors. The list goes on, but essentially there’s a group of people that have a high income because of their profession, but they also typically have a large amount of loans from student loans or business loans from starting the business or both. So there’s this good problem of having a high income, but now you have these loans to pay off and you also have high taxes, and most of their financial worth tends to get tied up in the business.
We will coach business owners on how to balance all of that. How do we reduce the taxes? How do we get money out of the business so that way not all of your financial worth is tied with the business? And then also how do we pay down the debt over time with the remaining cash? Here’s where profit sharing plans come into play. What a profit sharing plan will do is it will be an add-on to a 401k plan.
So let’s say we are working with a dental office and they have 10 people between all the hygienists and administrative staff. They don’t really have a retirement plan in place. They’re paying a lot of taxes, they’re looking for ways to reduce the tax so that way they can keep more money in their pocket, but also they’re trying to start saving for retirement because they haven’t done that much yet. Here’s what we can do. First, set up a 401k plan that allows the owner to really maximize what they can deduct and put into that 401k plan, but then it’s also giving the employees a benefit. So the employees can contribute to the 401k plan and get a match from the business owners. Now the employees are benefiting, they’re happy, they have a retirement plan in place, and they’re getting some extra money as far as a matching contribution, and the business owner is putting money outside of the business to increase their net worth out of the business. It’s not that we want to rip all the money out of the business, but we want them to have some money that’s not tied up in this one business because quite honestly, we come across a lot of business owners where their retirement plan is that some day they’re gonna sell their company, and that’s good. They probably will sell the company, but that should not be your entire retirement plan. Let’s get some money outside into just a 401k or IRA account so that way you have two different places to be building this retirement plan from.
So step one is to get the 401k plan in place. Business owner can maximize that and get the tax write-off, and the employees are thrilled because they are now having a retirement plan and getting a match from the company. With that 401k funded, we can add on a profit sharing on top of that, and again, in this instance, the employees are thrilled because now they’re getting extra money. They’re going to get a profit sharing plan. The nice thing from the employer’s perspective also is that you can put vesting requirements on the profit sharing plan. So it’s a good employee retention tool. So employees are getting more money, which is great, into their retirement accounts, but an employer can put a certain amount of time that they must remain in the company to get that money or to get all of it anyway. You can have it vest over time, you can have it vest all at once after X number of years, but it’s a good way to tell the employee, “we’re gonna give you extra money, but you have to stay here and work for us in order to get that”, the full benefit of that profit sharing plan. So it’s a good win for everybody, really. Plus, the profit sharing plan allows the business owner to put a lot more money away, and this all depends on employees, the age of everybody, how much money the business is making, but generally speaking, the business owner can put a lot more money away into the profit sharing plan, and thereby put more money into their retirement account and bring their taxes down even further.
So now we’ve solved a couple of key problems of how do we reduce our taxes? Because have the good problem of making a lot of money, but then also how do we get money out of the business and into something else that is generating wealth for us over time? And then also in part of our planning we’re obviously talking about paying off debt and all this stuff, but the profit sharing plan is not as well known as it should be because it can really provide a lot of benefits for the business owner to get the taxes down, get the money out of the company and building wealth elsewhere, and then also keeping employees extremely happy by benefiting them with the 401k plan match and the profit sharing that they will get over time. If you have any questions on this or need our help with it, please reach out to me, I’m happy to help.