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Tax Advantages of Retirement Plans via Roth, HSA & DBP

Mar 5th 2018
retirement plans

I used to buy into the concept that we either still buy into or are changing our opinions of. The concept of a retirement plan, at least when I learned tax, for the self-employed was to sock as much money away into these plans during your income-earning years when your tax bracket is higher. And then when it comes time to retire, you take the money out of retirement, and your income tax bracket is lower.

However, after all of those years, laws have changed, and we now have plenty of retirement plans.

The Roth IRA was introduced, which made withdrawals tax free. In the beginning a Roth had certain adjusted gross income (AGI) limitations. What followed was an evolution with Roths for those who were self-employed. You could open either a Solo 401(k) or a Safe Harbor 401(k). These plans allow for the best of both worlds. You could, through salary deferrals, put the maximum amount into the Roth portion of the 401(k), and then match your salary by 25 percent, which is deductible to the company. The contribution limit between the Roth salary deferral and 25 percent match, though, could only be $54,000.

Then we invented backdoor Roths, in which a person would open a new IRA account, make a non-deductible contribution to a traditional IRA and then convert it to a Roth the following day. The result of this transaction was tax free.

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