News & Tech Tips

Maximize your 401(k) plan in 2025: Smart strategies for a secure retirement 

Saving for retirement is a crucial financial goal, and a 401(k) plan is one of the most effective tools for achieving it. If your employer offers a 401(k) or Roth 401(k), contributing as much as possible to the plan in 2025 is a smart way to build a considerable nest egg.

If you’re not already contributing the maximum allowed, consider increasing your contribution in 2025. Because of tax-deferred compounding (tax-free in the case of Roth accounts), boosting contributions can have a significant impact on the amount of money you’ll have in retirement.

With a 401(k), an employee elects to have a certain amount of pay deferred and contributed to the plan by an employer on his or her behalf. The amounts are indexed for inflation each year, and they increase by a modest amount. The contribution limit in 2025 is $23,500 (up from $23,000 in 2024). Employees age 50 or older by year-end are also generally permitted to make additional “catch-up” contributions of $7,500 in 2025 (unchanged from 2024). This means those 50 or older can generally save up to $31,000 in 2025 (up from $30,500 in 2024).

However, under a law change that becomes effective in 2025, 401(k) plan participants of certain ages can save more. The catch-up contribution amount for those who are age 60, 61, 62, or 63 in 2025 is $11,250.

Note: The contribution amounts for 401(k)s also apply to 403(b)s and 457 plans.

Traditional 401(k)s

A traditional 401(k) offers many benefits, including:

  • Pretax contributions, which reduce your modified adjusted gross income (MAGI) and can help you reduce or avoid exposure to the 3.8% net investment income tax.
  • Plan assets that can grow tax-deferred — meaning you pay no income tax until you take distributions.
  • The option for your employer to match some or all of your contributions pretax.

If you already have a 401(k) plan, look at your contributions. In 2025, try to increase your contribution rate to get as close to the $23,500 limit (with any extra eligible catch-up amount) as you can afford. Of course, the taxes on your paycheck will be reduced because the contributions are pretax.

Roth 401(k)s

Your employer may also offer a Roth option in its 401(k) plans. If so, you can designate some or all of your contributions as Roth contributions. While such amounts don’t reduce your current MAGI, qualified distributions will be tax-free.

Roth 401(k) contributions may be especially beneficial for higher-income earners because they can’t contribute to a Roth IRA. That’s because the ability to make a Roth IRA contribution is reduced or eliminated if adjusted gross income (AGI) exceeds specific amounts.

Planning for the future

Contact us if you have questions about how much to contribute or the best mix between traditional and Roth 401(k) contributions. We can also discuss other tax and retirement-saving strategies for your situation.

Fraud risk assessment: Audit fieldwork. What auditors watch for

Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Here are some answers to questions about what auditors assess when interviewing company personnel to evaluate potential fraud risks.

What’s on your auditor’s radar?

When planning audit fieldwork, your audit team meets to brainstorm potential company- and industry-specific risks and outline specific areas of inquiry and high-risk accounts. This sets the stage for inquiries during audit fieldwork. Entities being audited sometimes feel fraud-related questions are probing and invasive, but interviews must be conducted for every audit. Auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period.

Specific areas of inquiry under Clarified Statement on Auditing Standards Section 240, Consideration of Fraud in a Financial Statement Audit, include:

  • Whether management has knowledge of any actual, suspected, or alleged fraud,
  • Management’s process for identifying, responding to, and monitoring the fraud risks in the entity,
  • The nature, extent, and frequency of management’s assessment of fraud risks and the results of those assessments,
  • Any specific fraud risks that management has identified or that have been brought to its attention,
  • The classes of transactions, account balances, or disclosures for which a fraud risk is likely to exist, and
  • Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.

Fraud-related inquiries may also be made of those charged with governance, internal auditors, and others within the entity. Examples of other people that an auditor might ask about fraud risks include the chief ethics officer, in-house legal counsel, and employees involved in processing complex or unusual transactions.

Why are face-to-face meetings essential?

Whenever possible, auditors meet in person with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal clues.

Nuances such as an interviewee’s tone and inflection, speed of response, and body language provide important context to the spoken words. An auditor is also trained to notice signs of stress when an interviewee responds to questions, including long pauses before answering or starting answers over.

In addition, in-person interviews provide an opportunity for immediate follow-up questions. When a face-to-face interview isn’t possible, a videoconference or phone call is the next best option because it provides many of the same advantages as meeting in person.

How can you help the process?

While an external audit doesn’t provide an absolute guarantee against fraud, it’s a popular — and effective — antifraud control. You can facilitate the fraud risk assessment by anticipating the types of questions we’ll ask and the types of audit evidence we’ll need. Forthcoming, prompt responses help keep your audit on schedule and minimize unnecessary delays. Contact us for more information before audit fieldwork begins.

Balancing the books: Regular bank reconciliations are essential for a successful business

How often do you reconcile your company’s internal financial records against your bank statements? Bank reconciliations are an essential internal control procedure that busy owners and managers sometimes overlook or neglect. Here’s why it pays to perform them regularly.

Operational benefits

Weekly or monthly bank reconciliations can improve the accuracy of your company’s financial records. You may uncover errors and omissions, allowing you to take corrective measures before internal problems spiral out of control. Bank reconciliations can also be an effective antifraud control. In addition to revealing fraudulent transactions, bank reconciliations may deter dishonest workers from engaging in criminal activity because they know someone is checking their work.

Moreover, bank recs improve accounts receivable management. For instance, if you notice bounced checks and bank overdraft fees when reconciling deposits, you might consider changing the credit terms for certain high-risk customers.

The reconciliation process

Typically, a bank reconciliation statement starts with the cash balance from the bank statement. After adding deposits in transit and subtracting outstanding checks, you’ll arrive at the adjusted bank balance. In other words, you’re adjusting the bank balance for transactions entered in the company’s books but not yet posted to the bank account.

Next, reference the checking account balance from the company’s accounting records. You’ll arrive at the adjusted book balance after adding interest income and subtracting bank fees. The bank has posted these transactions to the account, but they aren’t yet recorded in the general ledger.

The adjusted bank balance should equal the adjusted book balance. If not, you’ll need to determine the source(s) of the discrepancy.

Automation tools

Accounting software dramatically simplifies the bank reconciliation process by automating much of the matching and reporting. However, it’s not entirely hands-off. Regular review and manual adjustments may still be necessary to ensure accuracy and address discrepancies.

For example, manual review is often necessary for certain transactions that may be unrecognizable due to:

  • Discrepancies in dates, amounts, or descriptions,
  • Bank errors,
  • Duplicate transactions, and
  • Adjustments for such items as bank fees, interest income, or manual journal entries.

Initially, accounting personnel may need outside help setting up rules within the software to categorize recurring transactions.

Business intelligence

Reviewing the reports generated by your accounting software can help you manage cash flow more effectively and detect fraudulent activity. For example, you may unearth unauthorized transactions, altered checks, or phishing scams targeting the business’s account.

It’s critical to report fraudulent automated clearing house (ACH) transactions immediately. Reporting timeframes may vary by bank and jurisdiction, with some requiring notification within 24 hours. Notification for fraudulent checks is typically 30 to 60 days but can vary by state and financial institution. The sooner you report fraudulent transactions, the better. It will give you and your bank more time to protect your funds, including closing existing accounts and opening new ones.

From discrepancy to clarity

Regular bank reconciliations are more than bookkeeping tasks — they’re crucial for safeguarding a business’s financial health and operational integrity. Contact us for more information. We can help streamline the reconciliation process, determine the sources of hard-to-find discrepancies, and investigate suspicious activity.

What are retained earnings — and why do they matter?

Owners’ equity is the difference between the assets and liabilities reported on your company’s balance sheet. It’s generally composed of two pieces: capital contributions and retained earnings. The former represents the amounts owners have paid into the business and stock repurchases, but the latter may be less familiar. Here’s an overview of what’s recorded in this account.

Statement of retained earnings

Each accounting period, the revenue and expenses reported on the income statement are “closed out” to retained earnings. This allows your business to start recording income statement transactions anew for each period.

Retained earnings represent the cumulative sum of your company’s net income from all previous periods, less all dividends (or distributions) paid to shareholders. The basic formula is:

Retained earnings = Beginning retained earnings + net income − dividends

Typically, financial statements include a statement of retained earnings that sums up how this account has changed in the current period. Net income (when revenue exceeds expenses) increases retained earnings. Conversely, dividends and net losses (when expenses exceed revenue) reduce retained earnings.

Significance of retained earnings

Lenders, investors, and other stakeholders monitor retained earnings over time. They’re an indicator of a company’s profitability and overall financial health. Moreover, retained earnings are part of owners’ equity, which is used to compute certain financial metrics. Examples include:

  • Return on equity (net income/owners’ equity),
  • Debt-to-equity ratio (total liabilities/owners’ equity), and
  • Retention ratio (retained earnings / net income).

A business borrower may be subject to loan covenants based on these ratios. Care must be taken to stay in compliance with these agreements. Unless a lender waives a ratio-based covenant violation, it can result in penalties, higher interest rates, or even default.

Retained earnings management

Profitable businesses face tough choices about allocating retained earnings. For example, management might decide to build up a cash reserve, repay debt, fund strategic investment projects, or pay dividends to shareholders. A company with consistently mounting retained earnings signals that it’s profitable and reinvesting in the business. Conversely, consistent decreases in retained earnings may indicate mounting losses or excessive payouts to owners.

Managing retained earnings depends on many factors, including management’s plans for the business, shareholder expectations, the business stage, and expectations about future market conditions. For example, a strong retained earnings track record can attract investment capital or potential buyers if you intend to sell your business.

Warning: Excessive accumulated earnings can lead to tax issues, particularly for C corporations. Federal tax law contains provisions to prevent corporations from accumulating retained earnings beyond what’s reasonable for business needs. We can prepare detailed business plans to justify an accumulated balance and provide guidance on reasonable dividends to avoid IRS scrutiny.

For more information

Many companies consider dividend payouts and plan investment strategies at year-end. We can help determine what’s appropriate for your situation and answer any lingering questions you might have about your business’s statement of retained earnings.

Get tax breaks for energy-saving purchases this year because they may disappear

The Inflation Reduction Act (IRA), enacted in 2022, created several tax credits aimed at promoting clean energy. You may want to take advantage of them before it’s too late.

On the campaign trail, President-Elect Donald Trump pledged to “terminate” the law and “rescind all unspent funds.” Rescinding all or part of the law would require action from Congress and is possible when Republicans take control of both chambers in January. The credits weren’t scheduled to expire for many years, but they may be repealed in 2025 with the changes in Washington.

If you’ve been thinking about making any of the following eligible purchases, you may want to do it before December 31.

1. Home energy efficiency improvements

Homeowners can benefit from several tax credits for making energy-efficient upgrades to their homes. These include:

  • Energy Efficient Home Improvement Credit: This credit covers 30% of the cost of eligible home improvements, such as installing energy-efficient windows, doors, and insulation, up to a maximum of $1,200 this year. There’s also a credit of up to $2,000 for qualified heat pumps, water heaters, biomass stoves, or biomass boilers.
  • Residential Clean Energy Credit: This credit is available for installing solar panels, wind turbines, geothermal heat pumps, and other renewable energy systems. It covers 30% of the cost.
  • Energy Efficient Property Credit: For those investing in clean energy for their homes, this credit offers a significant incentive. It covers 30% of the cost of installing solar water heaters and other renewable energy sources.

2. Clean vehicle tax credit

One of the most notable IRA provisions is the clean vehicle tax credit. If you purchase a new electric vehicle (EV) or fuel cell vehicle (FCV), you may qualify for a tax credit of up to $7,500. The credit for a pre-owned clean vehicle can be up to $4,000. To be eligible, the vehicle must meet specific criteria, including price caps and income limits for the buyer.

The credit can be claimed when you file your tax return. Alternatively, you can transfer it to an eligible dealer when you buy a vehicle, which effectively reduces the vehicle’s purchase price by the credit amount.

3. Electric Vehicle Charging Equipment Credit

If you install an EV charging station at your home, you can claim a credit of 30% of the cost, up to $1,000. This credit is designed to encourage the adoption of electric vehicles by making it more affordable to charge at home.

Act now

These are only some of the tax breaks in the IRA that may reduce your federal tax bill while promoting clean energy.

IRS data has shown that the tax breaks are popular. For example, in 2023 (the first year available), approximately 750,000 taxpayers claimed the credit for rooftop solar panels. Keep in mind that a tax credit is more valuable than a tax deduction. A credit directly reduces the amount of tax you owe, dollar for dollar, while a deduction reduces your taxable income, which is the amount subject to tax.

So, act now if you want to take advantage of these credits. There may also be state or local utility incentives. Contact us before making a large purchase to check if it’s eligible.