In 2017, President Trump signed into law major tax reforms in an act called the Tax Cuts and Jobs Act. This Act includes sweeping changes across all corners of tax law and require new expertise and evaluation of individual tax strategies. Major tax reforms mean that business owners need to take a second look at their retirement planning especially. Impacts to employees for 2018 are minimal; however, their employers face serious impacts to their 401(k) maximums and more.
At first glance, these changes might seem superficial. 401(k) elective deferrals have gone up by $500, and while changes to 401(k) catch-up contributions have remained consistent, increases to maximum annual additions and considered compensation ($1000 and $5000) have been seen as well. However, significant changes to taxable income and income tax has the impact of devaluing 401(k) plans overall.
These numbers might initially suggest that changes to retirement contributions are not significantly different between employers and employees. However, reforms have changed qualified business income deductions.Though more specific advice from a qualified tax professional familiar with the IRS’s new guidelines might be necessary, generally we can say that owners of some businesses as well as sole-proprietors are now allowed a 20 percent deduction against their qualified business income. This leaves employers to balance a less valuable deduction against a less valuable tax deferral. Overall, by increasing contributions to a 401(k), employers are left increasing their tax burden, as well.This does not mean that employers should discontinue their retirement plans, of course. In fact, there are many worthwhile reasons to continue these plans–including attracting and retaining a higher quality of employee. By investing in their future, you can help ensure that they will invest in the future of your company. And though the personal impact may be to the business owner’s immediate detriment, the changes are small. And overall these plans still provide diversification of assets, protections from creditors, and wealth accumulation.