I know we’re all in the middle of festive holiday celebrations, and I hope you all had a wonderful Christmas with loved ones, but the end of the year is rapidly approaching, and I wanted to share some important information for potential tax savings. There is still time to save on 2019 taxes for those who can set up a retirement plan for their business – before December 31.

Here’s what you need to know.   

401(k): Did you know that as a small business owner, you can set up your own 401k plan? If you set up a 401(k) plan, the maximum amount that can be deferred from your salary for 2019 is $19,000. If you are 50 or older, you can contribute another $6,000 in catch up contributions by the end of the year for a total of $25,000. In 2020, these limits will rise to $19,500 and $6,500 for a total of $27,000. *Don’t forget to adjust your contributions at the start of the new year!

Profit-Sharing Plans: Setting up a profit-sharing plan means you can contribute the lesser of 25% of compensation or $56,000 for 2019. Profit-sharing contributions are employer contributions, so in addition to not being subject to federal and state taxes, they are not subject to Medicare or Social Security taxes. If you are a small business owner and you are not contributing to a profit-sharing plan, you could be missing quite a bit of tax savings.

The overall limit for both the salary deferral portion of the 401(k) and the profit-sharing is $56,000 for 2019.

Cash Balance Pension Plans: Are you already saving the maximum amount under the 401(k) and profit-sharing? If so, you could consider setting up a cash balance pension plan. These plans are not subject to the same limits as the 401(k) or profit-sharing plans. Instead, a present value calculation is used to determine the amount that can be put away on a pre-tax basis. Cash balance plans have contribution limits that increase with age. A person over 60 could be able to save over $200,000 annually in pre-tax contributions.

The most important thing to remember about the cash balance pension plan is that these payments are required payments each year, the contributions should be set at a level which is comfortable for the business. If you are thinking about selling your company in the next few years, a cash balance pension plan can be used to help shelter some of the proceeds from the sale. The first step to determine if it is appropriate for you is to do an employee census. The investments in the plan must, by nature, be very conservative. These plans are typically funded predominantly with Treasury securities.

Are you interested in more information on these plans? How they would work for your business and what the tax savings could be? Feel free to contact me at 925.262.4800 or email me at, and let’s get this implemented before December 31!

Best wishes,

Diane Johnson, ESQ., J.D.*, CFP®

*Licensed, but not practicing

Securities offered through Securities Service Network, LLC, Member FINRA/SIPC. Advisory services offered through SSN Advisory, Inc., a Registered Investment Advisor.

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