Do You Sponsor a Defined-Contribution Retirement Plan?

Published on January 13, 2015

It Might be Time to Evaluate Congress’ Proposal for Change—and Look into Self-Direction.

Tax reform

Tax reform is likely to appear on our horizon in the near future, when the 114th Congress takes office next month. According to an article in Investment News, the enactment of new revenue-raising initiatives could be implemented which have the potential to make it harder for business owners to save for retirement. This is in relation to employer-sponsored 401(k)s and other defined-contribution retirement plans. The article suggests that business owners and their financial planners evaluate whether the current proposals would affect their retirement plans, and explore available strategies to mitigate the impact of regulatory changes (or increase savings) before potential new limits are enacted.

The Congressional Budget Office projects $414 billion in federal tax revenue lost to defined-contribution plans between 2015 and 2019; this shortfall stems from contributions made on a pretax basis and earnings that are tax-deferred. Although these monies would be subject to tax once retired account holders make withdrawals from these retirement plans, these future revenues are “essentially invisible to federal budget makers who view the world through a 10-year window.”

Several proposals before Congress

One proposal regards lowering the caps on annual contributions by plan participants. This would generate more tax revenue (since contributions are made on a pretax basis) but making saving for retirement through these particular vehicles more difficult. The contribution cap for 2015 will be $18,000 with another $6,000 allowed for those age 50 and older (as a catch-up contribution).

Another proposal meant to raise tax revenues places tighter limits on tax deductions taken by small-business owners for contributions made on behalf of employees to a retirement plan. This provision could have a potential negative impact on small-business owners and on formation of employer-sponsored plans. Many employers sponsor 401(k)s with a profit-sharing plan model, and make contributions on behalf of all employees—including the owner and executives—as an equal percentage of each employee’s salary. (Others with more advanced designs permit bigger contributions on behalf of business owners and key employees based on various criteria.)

A third proposal calls for freezing the contribution limits that apply to defined-contribution plans until 2024. After that, the limits would rise to track the cost of living. This proposal also calls for cutting the allowable pretax contributions by participants in half, and the other half of allowable contributions to be made as Roth or after-tax contributions.

Regardless of whichever proposals end up being enacted, this is a wake-up call for business owners who sponsor 401(k) or other retirement savings plans. Some people may want to make sure they are saving as much as current law allows now, or establish different kinds of defined-benefit plans after consulting with their legal and tax advisors, and plan administrators. Another way to mitigate the impact of congressional tax reform is for business owners—or anyone for that matter—to control their retirement plan more directly through self-direction.

Self-directed 401(k)s and other retirement plans

Accelerating your saving in any retirement plans is always smart—and for savvy investors who wish to make all their own investment decisions, self-direction is a great way to build to build retirement wealth through assets they already know and understand.

Self-directed 401(k)s offer the same pre-tax savings as do traditional 401(k) plans, but with the ability to invest in a much broader range of assets. This may appeal to business owners and employees who are seasoned investors and who are experienced at researching various types of investments; they may prefer to participate by making their investment decisions from both traditional and nontraditional investments (depending on the limits placed on the plan).

A self-directed 401(k) plan allows participants under the age of 50 to contribute up to $52,000 and $57,500 for plan participants over the age of 50; participants may also borrow up to $50,000 for any purpose. Also called an Individual 401(k) plan, it can be adopted by a sole proprietorship, LLC, partnership, or corporation.

Don’t wait for the 114th Congress to start debating legislation that will limit retirement plan contributions; take control of your future today with a self-directed retirement plan. Next Generation Trust Services has all the information you need to learn about and open any type of self-directed plan, and our knowledgeable professionals are available to answer your questions and get you started.

Read more about self-directed IRAs here

Then contact Next Generation at Info@nextgenerationtrust.com or call (888) 857-8058 to take control of your retirement, today.