Cross Tested Retirement Plans allow professional business owners such as Dentists, Doctors, Attorneys, and CPA’s to save more for retirement and reduce taxes. These plans are most suitable for business whose owners are generally older and more highly compensated than other employees. They may be most appropriate for professionals who own their firm and are approaching retirement.

How To Maximize Retirement Savings Using Cross Tested Plans

My friend, Doctor Drew the Dentist, owns his practice. He recently looked at last year’s tax bill in shock and asked his tax advisor how he might  reduce federal taxes in the future. That’s a reasonable question this time of year and there may be a solution. If you are a Doctor, Dentist, Lawyer, or even a CPA, and you own, or are a partner, in your firm, you may be able to implement a retirement plan design that allows you to maximize your retirement contribution and reduce your tax liability while maintaining reasonable staffing costs.

I’m Chuck Lewandowski, CERTIFIED FINANCIAL PLANNER™ professional and I’m going to discuss how “Cross Testing” your 401k plan may help achieve significantly higher retirement savings while minimizing federal taxes and labor costs.

Many professional service firms have implemented basic 401k plans. Some have taken these plans to the next level of saving by adding safe harbor and profit-sharing provisions. A “cross-tested” plan allows a greater percentage of the profit-sharing contribution to be allocated to the owners.

What Types of Business Benefit the Most From Cross Tested Plans?

Cross tested plans work best if the owners are significantly older and more highly compensated than employees. The plans make sense if the owner would like to benefit employees with tax and cost efficiency. Dr. Drew the dentist is nearing 60. He owns his practice, and his associates and staff are mostly in their 30’s and 40’s. His plan may be a candidate for cross-testing.

How Does Cross Testing Work?

A cross tested plan segments employees into groups. These groups can be as small as one person. In Dr. Len’s practice, he may be the only person in his “group”. The IRS allows a greater portion of profit-sharing contributions to be given to the older employees and less to younger employees because younger employees have the benefit of a longer time until they reach retirement.

Cross-testing is only one method of customizing retirement plans to meet the needs of your unique employee population. If you want to explore this and other retirement plan designs to help you max out retirement savings and reduce taxes, please give me a call and Let’s Make a Plan.

Advisory services offered through Capital Analysts, or Lincoln Investment, Registered Investment Advisers. Securities offered through Lincoln Investment, Broker-Dealer, and Member FINRA/SIPC,  www.lincolninvestment.com.  West Coast Financial Group, Inc., and the above firms are independent and non-affiliated. Tax services are not offered through, or supervised by The Lincoln Investment Companies. 

None of the information in this document should be considered as tax advice.  You should consult your tax advisor for information concerning your individual situation.