With tax season almost behind you, it’s time to look for more ways to help clients strengthen their financial posture for the rest of 2016, and into the future. One way to do so is to optimize their tax-qualified retirement plan strategies.

“Whether you’re dealing with a business owner or someone who works as an employee, you can often find ways to help clients get more from their retirement plans,” said Chad Smith, a wealth management strategist at HD Vest Financial Services.


Business owners who are just trying to get their enterprise off the ground often don’t even have a retirement plan in place because they’re investing as much as they can in the business. While that might make sense in the beginning, it can be a serious mistake in the long run.

That’s because they probably aren’t diversifying their investments, and are walking away from the benefits of tax deferral. Also, sponsoring a retirement plan can play an important role in helping business owners to retain good employees.

The key to optimizing a business owner’s retirement plan strategy — whether that means starting a new plan or making changes to an existing one — is having the right plan. Typically some form of defined-contribution plan, like a 401(k), is put in place. But in some scenarios, the old defined-benefit format, in which a projected stream of retirement income is funded on an ongoing basis according to a formula based on the individual’s anticipated final salary and years of service, may make more sense.


In general, DB plans allow business owners to make much larger annual contributions, particularly if the business owner is at least early middle age. That’s because funding limits are based on the dollars that will need to be set aside to fund the ultimate annual retirement benefit (currently capped at $210,000); the fewer years available to fund the benefit, the higher the annual contributions required.

If the business owner’s goal is to keep overall plan costs — particularly required contributions for employees — in check, a DB plan might not be a good idea. From that perspective, the key is that the business has a small number of employees, particularly younger ones who probably will move on before retirement. DB plans also are more expensive to administer than defined-contribution plans, but under the right circumstances, they can be well worth it.

Otherwise, a DC plan is probably the way to go. Keep in mind that DC plans can be profit-sharing-based, so that any employer contributions to employee accounts are discretionary, based on company profitability. In many circumstances, an IRA-based small-business retirement plan like a SEP or SIMPLE account may offer good contributions with less administration and lower costs.

The trick to maximizing the potential of a defined-contribution plan, particularly a 401(k) plan, is making sure that lower-paid employees contribute enough to avoid having the plan fail discrimination tests. When that happens, higher-paid employees’ contributions are constrained, and sometimes returned to them as taxable income.


“Needless to say, deciding what kind of retirement plan would work best for a small-business owner, the fine points of plan design, plus implementation, aren’t a simple matter,” said Smith. “Directing clients to qualified experts can be a tremendous service, and keep you in a strong position to play a role in managing the plan’s assets.”

For clients that already have a retirement plan in place (whether they’re a business owner or someone else’s employee), there is probably a lot of optimizing to be done, and you can start with these simple questions. Is the client:

Getting the full benefit of plan employer-matching contributions, and deferring enough income to meet long-term goals?Allocating plan assets appropriately when factoring in the assets that the client has outside the plan, both for investment diversification and tax planning purposes?Regularly rebalancing investments to maintain their desired asset allocation?Taking advantage of the opportunity to also contribute to an IRA?Choosing appropriately between a Roth and a standard IRA?From reviewing clients’ tax returns, you already have a head start in knowing their retirement savings patterns. That knowledge can be put to good use to get the conversation started.

Published in partnership with HD Vest.

For more information about HD Vest Financial Services and how they can help you transfer a client’s wealth, visit hdvest.com/join or contact a Business Development Consultant at (800) 742-7950.

HD Vest Financial Services® and its affiliates (collectively, “H.D. Vest, Inc.”) do not provide tax or accounting services. You should consult your tax professional regarding the tax implications of any investments.

The views and opinions presented in this article are those of Chad Smith and not of HD Vest Financial Services® or its subsidiaries.

HD Vest Financial Services is the holding company for the group of companies providing financial services under the HD Vest name.

Securities offered through HD Vest Investment Services, Member SIPC, Advisory services offered through HD Vest Advisory Services, 6333 N. State Highway 161, Fourth Floor, Irving, TX 75038, 972-870-6000.