November 2019 Q and A

Question:

I just inherited a large amount of money. Will I have to pay income and estate taxes on the funds?

Answer:

One of your first steps should involve talking to a tax professional to learn more about your personal situation. You typically won’t pay estate taxes; the estate will, if tax is due. But your state may impose an inheritance tax on a portion of what you receive. As important, seek qualified financial advice and consider working with an attorney. Go slow, and consider paying off debts first. After that, look at financial vehicles such as qualified retirement plans and college savings plans to take care of long-term financial goals in your life.

Question:

I am considering adopting a 401(k) plan for my business, but I heard something about discrimination testing. What is that?

Answer:

Discrimination testing ensures non-highly compensated and highly compensated employees in traditional 401(k) plans are treated equitably. In other words, contributions made for rank-and-file employees should be proportional to contributions made for owners and managers, and testing must be done annually. To avoid discrimination testing, you might consider adopting a safe harbor 401(k) plan, for which you would have to contribute 3% of compensation for each employee, match 3% of employees’ contributions and half of their next 2%, or match 4% of employees’ compensation.