In this interview episode, I have Matt Ruttenberg on again to continue our discussion on retirement planning for small businesses. This time, we do a deep dive into tax credits! Matt explains the recent changes in tax credits and how they can help businesses save substantial amounts of money for their 401(k) plans. Tune in for some practical strategies on taking advantage of these tax credits!
In this episode you’ll hear:
detailed breakdown of tax credits
tax credits under Secure 2.0 and Secure 1.0
case study example
discussing retirement planning, tax credits, and 401(k) implementation with clients
Meet Matt I am a 401k (retirement plan) expert and education business owners, accountants, bookkeepers, etc. on the vast retirement plan space. I am the CMO/Co-Owner of Life, Inc. Retirement Services, an independent 401k administration company building custom retirement plans for small and mid-sized business. I am also the Founder of SureLI Insurance, and online insurance agency focused on serving the Financial Independent Community.
Thanks for listening. If this episode inspired you in some way, take a screenshot of you listening on your device and post it to your Instagram stories and tag me, @ambitiousbookkeeper
For more information about the Ambitious Bookkeeper Podcast or interest in our programs or mentoring visit our resources below:
Thank you for your support of our show. If you haven’t left a review yet it’s super simple. Please go to: https://www.ambitiousbookkeeper.com/podcast and leave your review.
In this interview episode, I have Matt Ruttenberg on again to continue our discussion on retirement planning for small businesses. This time, we do a deep dive into tax credits! Matt explains the recent changes in tax credits and how they can help businesses save substantial amounts of money for their 401(k) plans. Tune in for some practical strategies on taking advantage of these tax credits!
In this episode you’ll hear:
detailed breakdown of tax credits
tax credits under Secure 2.0 and Secure 1.0
case study example
discussing retirement planning, tax credits, and 401(k) implementation with clients
Meet Matt I am a 401k (retirement plan) expert and education business owners, accountants, bookkeepers, etc. on the vast retirement plan space. I am the CMO/Co-Owner of Life, Inc. Retirement Services, an independent 401k administration company building custom retirement plans for small and mid-sized business. I am also the Founder of SureLI Insurance, and online insurance agency focused on serving the Financial Independent Community.
Thanks for listening. If this episode inspired you in some way, take a screenshot of you listening on your device and post it to your Instagram stories and tag me, @ambitiousbookkeeper
For more information about the Ambitious Bookkeeper Podcast or interest in our programs or mentoring visit our resources below:
Thank you for your support of our show. If you haven’t left a review yet it’s super simple. Please go to: https://www.ambitiousbookkeeper.com/podcast and leave your review.
Total savings, is somewhere in the ballpark. It's going to be around 65, 000 of tax credits over those five years. Wow. That's a lot. That's a lot of money to put back into your business or put that in your own pocket for retirement savings or, use it for other employee benefits, things like that. So very, very substantial. Yeah. Welcome back to the Ambitious Bookkeeper podcast. I have Matt Ruttenberg back on air today to do a part two around retirement planning for your small business. And today we're going to do a deep dive into tax credits, because we just couldn't get to it last time. So Heh. back, Matt. How are Good. Thanks, thanks for having me again. of course. So I'm just going to let you jump right in and if you're listening and you didn't catch the last episode we did, I will link it in the show notes. We kind of give the basics around, retirement planning for your small business, the options that are available to you, if you have employees versus not, and, today we're going to just dive deeper into that topic. So where would you like to Oh, yeah. So, oh my goodness. So we have lots of information today. just keep in mind with this. Everything with a foreign K plan with the fairness laws and all these tax credits are geared around your employees, not necessarily for you. They're incentivizing you to implement these foreign K plans. And, offer these benefits to your employees. So, I want to kind of start with, where we're at today and then want to back into kind of where we came from with these tax credits. So secure 2. 0, this passed in the 11th hour of 2022 implemented. The next day, basically for 2023. And, substantial, one of the biggest changes, if not the biggest change to the foreign K industry ever. one of those reasons is because of the, , the tax credits. And so let's kind of go back a little bit. There was this, you know, secure 1. 0 or secure act, and that passed in 2019. And, and. what they introduced then, and prior to that, you only had a measly, I think it was 500 tax credit, on a good day. If you implemented a foreign K plan, they then, added something called the startup credit and it was a 250 per non highly compensated employee up to 50 percent of your out of pocket expenses. So let's just say it all added up and you had, 5, 000 per year of out of pocket expenses, you'd get up to 2, 500. depending on, you know, your employee pool now, what is a highly compensated employee kind of, let's take a step back real quick, highly compensated employee is 155, 000 or more. An owner or a direct relative, like a child or a spouse of the owner. Those do not get any of that tax credit. it's for the non highly compensated employees that get that 250. Okay. So that was secure 1. 0. They also had a 500 auto enrollment credit. So what that means is if you create an opt out plan instead of an opt in plan. So they had to sign a form to say, I don't want to be a part of it. Instead of signing the form to be a part of it. Okay. So that's secure 1. 0, 2019. So let's fast forward to 2022, 2023 and they improved it even more. Okay. So that startup credit, the 250 per employee, that is now a hundred percent of your out of pocket expenses. So you could literally create and design a net zero out of pocket, with no administration fee whatsoever for the first three years. Now that, that, that startup credit goes for the first three years of your plan. So up to 5, 000 for the first three years. Okay. And then it goes away. then we still have that 500 auto enrollment credit. And that's basically for, again, the opt out. So you can add that that's also for the first three years. So those two tax credits offset your costs to the administrator, to the record keeper, and this is for, employees for under a hundred, companies for less than a hundred employees. Okay. mm hmm, So let's add another tax credit. Under 2. 0 it's, this is, this is the astonishing one that they added. And this is the one that really turns heads. So, it's called the contribution credit and this is brand new. And, a lot of people don't have never even heard of this, to be honest with you. So it is up to a thousand dollars per year. And it dwindles down over five years per employee that earns under a hundred thousand dollars to offset the match. Or the employee contribute employer contribution. Okay. So the math is specific math is 50%, up to 50 percent of what you're giving your employees with a cap of a thousand dollars per employee. So, basically if you have, 40 employees that earned under a hundred thousand dollars, you're going to get 40, 000 up to 40, 000 in tax credits. And it goes, it's over five years. So it's a hundred percent. Of the thousand, a hundred percent, a thousand, then it goes 75, 50, 25, zero. So you'll have this stretched out tax credit for five years that starts to dwindle down to zero. okay, I have a Yes. Those, the five years, Is it a locked in five years, so as soon as you take the credit the first year, you now have five years, or is it five years for each employee? Does that make So it's, it's five years. you're filing form 8880. That's the IRS tax form. and prior to 2. 0 is much shorter now, 2. 0 it's a much longer form. so it's kind of re ups every year, basically. So it's for the first five years and I'm going to. There's a, there's a nuance. It's only for plans. And I'm going to, there's a, there's a 23 and beyond. If you have a plan prior to that, you get this secure 1. 0 tax credit in the year 2022 it's not like from the year of the employee starting, it's from the year of the startup, and then you're just reevaluating, reevaluating that form 8880 on a year by year basis. So, if you have new employees being introduced, like, in year 3, it's going to be still that same calculation from the beginning. Okay, so year three is the 75 percent or Yes, exactly. Exactly. So yeah, it's, a lot. It's a lot. We like to put those in, in every single proposal that we have, just cause you can see what is your net cost. it's done at the end of the year, through your, accountant CPA, or yourself, however you file. And it's a, it's just substantial. It's, not as well known as we would like it to be. Let's put it that way. Yeah, so essentially the government is trying to encourage employers to create matching programs so that our people will save for retirement. Yeah. And this is even, that are kind of requiring this type of stuff, but this is on a federal this is on a federal level and it gets into, any state that you live in. It works. And it also works for simple IRAs. That credit goes towards simple IRAs as well. So you're not just stuck in having to do a 401k. So if the simple IRA makes sense, let's get the tax credit for that too. hmm. And go back to listen to our last episode together where we talked about the different Yes. and we'll make sure to link those in the show notes as well. so can you give us, are those all the tax credits that you wanted to talk Yeah, those are all the tax credits available. There, obviously there's a lot more tax credits just from a business standpoint on what you can do. But from a 401k standpoint, this is what, this is what we're doing. And we're, and we're doing this. we have calculators that we use this for. We actually have one on our website too, where you can get in there and just plug it in and you'll get the estimated tax credit right off the bat. but the whole point is, is that like to use this, you know, don't, don't let it go to waste, you know, use it to reinvest in your business. use it to. Implement more of a retirement plan, even for yourself, just on an individual level for the business owner. So there's so many little things, to maximize that tax savings. It's a tax credit. This isn't a deduction. It's a full credit. So like a dollar for dollar credit type of situation? Okay. Mm hmm. And if you're listening and you're not sure what a deduction versus a credit is, there's definitely resources out there. Yes. I encourage you to get familiar with that because your clients are going to have questions about it anyways, and it's really good to be able to explain that to your Mm hmm. what's a deduction versus a credit. so can you give us like a case study example of when you guys have worked through this with a specific Yeah, absolutely. So I'm gonna, I'm gonna work through the actual calculator that we use., I want to kind of do a real case scenario for a client, that we've recently on boarded, I want to kind of explain something before I get into this piece. so all these credits for, for employees up to 100, businesses with up to 100 employees. If you have 50 and below, all these tax credits are at the levels that I explained that contribution credit. I forgot to mention this. Anything above 50 employees to 100, it starts diminishing per employee just slightly by 2 percent per employee. So. For example, if you have 51 employees and they're all participating and they all get that contribution credit of a thousand dollars, it's now 2 percent less. Okay. It's just slightly 2 percent less. And that dwindles, obviously, as you get closer to a hundred, then it wipes down to zero, 0%. So in this case study, we had a business with 25 employees. and these are all the numbers that we need. There's only four sets of numbers that we need for this 25 employees. 23 participants. So we have two employees that decided not to participate. 20 of those 23 are non-high compensated employees. So under the 1 55, they're not owners, they're not kids. So that means there's three people who had, , who are owners basically. And this, they're all three of 'em. There's a three, a three-Way partnership on this, and there's 15 of those 20 that earn less than a hundred thousand dollars. So 25 total employees, 23 participants, 20 non highly compensated participants, and then 15, who earn under a hundred thousand dollars. Okay. So the tax credits on that in year one is 20, 500 for years one and two. And then it goes down to 16, 750 and then 7, 500 and then 3750. So the breakdown is 15, 000 towards those. Employees who earn under a hundred thousand dollars, right? so that's 15, 000 that can go towards the match or the contribution. However, the plan design works out. Then we have a 5, 000 administration credit. That goes towards the out-of-pocket expense. And then we have the $500 opt-in, auto enrollment credit. So totaling, yes. So though that's just a flat $500, per year. So auto enrollment is going to be mandatory into the year 2025. so starting in next year, every plan that has started from 2023 and on, it has to be an opt-out plan instead of an opt-in plan. So we're taking advantage of it. Every plan of design has an opt out feature that you have to add to it because there's an extra 500 bucks for you. So total savings, I think I cut you off or maybe I I didn't wait to ask my question Yeah. hear the answer, but the total savings for this client. Total savings, is somewhere in the ballpark. It's going to be around 65, 000 of tax credits over those five years. Wow. That's a lot. That's a lot of money to put back into your business or put that in your own pocket for retirement savings or, use it for other employee benefits, things like that. So very, very substantial. Yeah. Did you, in that calculation, do you have the, , plan administrative costs, like, reducing that? Or is that prior to using that for those types of out of pocket expenses? so yeah, so a plan of that size, the costs are going to be somewhere. I'm looking at a number of record keepers that we work with. Almost every single one of them, I'm looking at a, you're maxing out your tax rate. So you will have no out of pocket expense for every single record keeper. We work with dozens of them, and each has their own niche. So some are a little bit more expensive than others. but every single one of them, is you're going to max out your out of pocket expenses. So you will have a net zero cost for the first three years of that. Of actually implementing and, and even implementation costs. It covers that, that too. There's a lot of tax credits on that. And then, and then you have that 15, 000 to offset your match. So we're able to, we're absolutely able to, to design net zero plans right now. Cool. Yeah. okay. So, Do you have anything else that you're, like, currently seeing in the industry, or doing, like, what types of plans are you doing the Yeah. Yeah. So something that like, if, if you're looking, if you're really in the budget mindset of, you're looking, you're, you're trying to, You want to implement something, but you really want to make sure it's cost effective, right? You're not ready to, stockpile, maybe your own money into the plan. It's purely for, the employee benefit because you're maybe a newer company. and we want to, really recruit and retain. That's the goal. So we will design, a kind of a. Whether it's a simple IRA, which is a good first step sometimes, because there's no administration costs, but at the same time, you're limited on what you can do inside of a simple IRA. So if you're getting those costs paid for, and you've, you see a projection of your business going high enough to where after three years, you can pay for those, administration costs, then, the foreign K might be better. But, you know, a traditional foreign K is always a good first step too. You know, you're able to do the Roth. You can still do profit sharing on the, on the years that you want to do them. and what we do there is we design a low. It's always good to start low. You don't want to over promise because if you have to cut that back, that takes away a lot of confidence from employees. So you want to be able to, let's say we do, uh, a 25 percent match on six, right? So you're, Okay. Employees put in six, the most you're, you're going to have to match them is 1. 5%. And that's going to help really cover the costs are really going to help cover that. That tax credit, or that, that out of pocket expense. So it might not cover all of it, depending on your employee pool and it's all based on how much they make, how much their salaries are, and then how much you're doing, but being able to mold that traditional 401k, really, really, really helps to be able to stay within that budget and, and have a net, very, very net low costs on these plans for the first three to five years, it's phenomenal. And then, so, do you see that the companies that in creating these plans like this? Are they, I'm assuming they have better retention, but do you, do you see Oh, yeah. do you see that those businesses actually just become more successful and then later on they're just able to afford these plans for their employees? I mean, yeah, of course, employee benefits is very popular these days. You know, it used to be, you know, how much money am I getting paid? And now employee benefits are coming back as a really popular, solution to be able to recruit and retain, your employees. You're not only in competition with your competition. For your clients and, or your, the, the folks that you service, you're in competition for the employee side of it too. So you need to be able to create something, for them to stay with you and you can create these long gated, up to six years of investing schedule, you know, to where they don't get the money, that you've matched them, fully through the six years. But if they, If they leave, then that money goes back into the coffer, back into the, into the foreign K plan. You can use that for other costs and, and, and the matching and all that too. but when you design these low cost plans, the vesting schedule and the match, the tax credits and everything go into the conversation that we have. And it's all about what is that number one goal that you have? Well, what is the goal? What, what's the purpose of this plan? Is it to recruit and retain, or is it for you to stockpile? And save taxes and it could be both. So we all, then we come down and say, what is your net? Are you in the black? You in the red? What's the goal? What is the goal? And sometimes it works. Sometimes it doesn't with these tax credits. And then we have to go back to the drawing board and redesign the plan. and it's nice to be able to do that in a custom fashion instead of a plug and play prototype, which we talked about last time too. So, lots to go into it on the plan design with tax credits. What's your budget? What kind of, record keeper, every record keeper has a niche. Some are great with startups, some are great with a lot of money, and some have, love a lot of employees, and they're all priced to that. And we just got to find the one that works out. Okay. Very good. So, This is a really valuable conversation to listen to as a business owner for anyone who is building their bookkeeping or accounting business and starting to build a team. But it's also a really valuable thing to just be aware of for your client's sake. So if you know that your client has, some, you know, they're growing and they're trying to attract and retain employees. You can give them that information and be like, you should talk to this guy. I mean, I have clients that are looking at their long term planning too, like in our thirties, forties age range, it's like, okay, now is especially as an entrepreneur. If you have an exit plan or not, like, you still need to think about what you're going to do in retirement. yeah, we don't want to go back to corporate. So, it's a good conversation starter for your clients. And, especially, I feel like summertime is a, are more low key. People aren't like, front facing as much, but I feel like a lot of business owners kind of take a step back and re evaluate things during the summer, work on systems, all the back end stuff. So now is a really good time to, yeah. up to your clients. That's true. The, the, the foreign K industry is very, streaky. Yeah, it's, you know, October coming up this summer is very busy because you have the safe harbor, deadlines and end of year, which is, and then you have, you know, filing time. What can we do for the last year? So there's a lot of. Just, ask questions ahead of time. That's the biggest thing. Trying to shotgun this at the last minute creates a lot of problems. And then you have to make amendments, to the plan, which is fine. We don't charge for amendments, but so it's a, it's a fluid conversation from year to year. Yeah. Yeah. So thank you so much for being willing to come back on the podcast to talk about the tax credits. We kind of, I think we didn't, we were, I don't think we were even really aware of it until we stopped the recording last time and then you were like, oh yeah, I forgot to talk about tax credits. So, this is really good to kind of it in a little digestible way instead Yeah. hosing everyone in the last episode. But if you're listening and you want to connect with Matt, please, his information is going to be in the show notes. Please reach out to him on behalf of your clients, for yourself, whoever you can think of. These are really great tax credits and opportunities to just help businesses grow and, retain good teams. So thank you so much for coming on. Is Yeah. else you want to share? I got a whole slew of information, but I'm going to hold back on it. As you said, the fire hose is sometimes too much, so maybe next time. Okay. And, yeah, so if you enjoy this episode, please make sure you share it with someone and, connect with myself and Matt and we'll talk to you next time.