Procrastination PosterOr six non-alliterative reasons why waiting until the last minute to establish a retirement plan can be costly. And by last minute, I mean year-end.

The conventional wisdom is that you can wait until the end of the year to put a retirement plan in place since you can still get the tax benefits for the whole year. Maybe so, but here are four considerations to keep in mind:

1.  S-corporation Compensation.

Let’s say you’re a shareholder-employee of an S-corporation; and you’re one of those shareholder-employees who minimizes W-2 compensation for payroll tax reasons. The remaining available dollars are considered distributable income to a shareholder and must be included in the shareholders taxable income; however, the distributions are not subject to FICA tax and are not considered self-employment income subject to self-employment tax. Thus, minimizing W-2 income also minimizes the basis upon which retirement benefits can be provided.

2. Deferral Election.

Maybe you want to set up a 401(k) plan for the year. If you do, there may not be enough time for you to maximize your 401(k) contributions as an employee of your corporation. Remember 401(k) contributions must be elected in advance and withheld by the employer. A December plan adoption only provides December payroll as a basis for employee deferral, but

3, 4, and 5. Deadlines.

In chronological order:

No. 3. In order for that 401(k) plan to be effective for the current year, it must be established by October 1 of that same. The same deadline required to amend an existing profit sharing plan to add a 401(k) provision.

No. 4. If you want to replace your SIMPLE with a 401(k) plan this year, you can’t. Notice must be provided to employees no later than November 1 of the current year that it will be terminated and replaced by a 401(k) plan next year.

No. 4. If you want to take advantage of a 401(k) Safe Harbor, notice must be provided to employees no later than December 1.

6.  Finally, Talk to a Financial Advisor.

He or she might tell you that by making regular, systematic investments throughout the year, you get the benefit of “dollar cost averaging”, and don’t have to worry about timing the market.

Bottom Line: Time is money. BENJAMIN FRANKLIN, Advice to Young Tradesmen, (21 July 1748)