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Retirement savings

Establish a Tax-Advantaged Retirement Plan for Your Business Today

Ken Botwinick, CPA | 04/18/2024

Considering a Retirement Plan for Your Business: Tax Advantages and Planning Strategies

If your business has yet to establish a retirement plan, now presents a prime opportunity to do so. Current retirement plan regulations offer substantial benefits through tax-deductible contributions.

For instance, if you’re self-employed, setting up a SEP-IRA allows you to contribute up to 20% of your self-employment earnings, with a cap of $69,000 for 2024 (increased from $66,000 in 2023). For those employed by a corporation they own, contributions of up to 25% of their salary are permissible, also up to $69,000. In a 32% federal income tax bracket, maximizing these contributions could potentially reduce your 2024 tax liability by as much as $22,080 (32% × $69,000).

Exploring Your Options

Various retirement plan options are available for small businesses, including:

  • 401(k) plans, which can be tailored for sole proprietors (often referred to as solo 401(k)s),
  • Defined benefit pension plans, and
  • SIMPLE-IRAs.

The deductible contributions permitted by these plans can vary, depending on your specific circumstances. For instance, in 2024, participants in a 401(k) plan can contribute $23,000, with an additional $7,500 allowed as a catch-up contribution for those aged 50 or older.

Consider Timelines

Thanks to a provision introduced by the 2019 SECURE Act, qualified employee retirement plans (excluding SIMPLE-IRAs) can now be adopted by the due date (including extensions) of the employer’s federal income tax return for the year of adoption. This change allows deductible employer contributions to be made by this same deadline, with deductions claimed on the return for the adoption year.

Key Details

It’s important to note that this provision does not affect the October 1 deadline for establishing a SIMPLE-IRA plan, nor does it override requirements mandating certain plan provisions be active during the plan year, such as those governing employee elective deferral contributions in a 401(k) plan.

For example, for a sole proprietorship operating on a calendar tax year, the deadline to establish a SEP-IRA for the 2023 tax year, with extensions, is October 15, 2024. Similarly, contributions for the 2023 tax year must be made by this date. Looking ahead to the 2024 tax year, the deadline for both establishing a SEP and making contributions is October 15, 2025, with extensions.

While it’s permissible to delay setting up a retirement plan until next year (excluding SIMPLE-IRAs), taking action now as part of your tax strategy can prove advantageous. We can provide further insights into small business retirement plan options tailored to your needs, ensuring compliance with any applicable contribution requirements for your employees.

© 2024

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Retirement Saving Options For Your Small Business: Keep It Simple

Ken Botwinick, CPA | 04/15/2023

If you’re thinking about setting up a retirement plan for yourself and your employees, but you’re worried about the financial commitment and administrative burdens involved, there are a couple of options to consider. Let’s take a look at a “simplified employee pension” (SEP) or a “savings incentive match plan for employees” (SIMPLE).

SEPs are intended as an attractive alternative to “qualified” retirement plans, particularly for small businesses. The features that are appealing include the relative ease of administration and the discretion that you, as the employer, are permitted in deciding whether or not to make annual contributions.

SEP involves easy setup

If you don’t already have a qualified retirement plan, you can set up a SEP simply by using the IRS model SEP, Form 5305-SEP. By adopting and implementing this model SEP, which doesn’t have to be filed with the IRS, you’ll have satisfied the SEP requirements. This means that as the employer, you’ll get a current income tax deduction for contributions you make on behalf of your employees. Your employees won’t be taxed when the contributions are made but will be taxed later when distributions are made, usually at retirement. Depending on your needs, an individually-designed SEP — instead of the model SEP — may be appropriate for you.

When you set up a SEP for yourself and your employees, you’ll make deductible contributions to each employee’s IRA, called a SEP-IRA, which must be IRS-approved. The maximum amount of deductible contributions that you can make to an employee’s SEP-IRA, and that he or she can exclude from income, is the lesser of: 25% of compensation and $66,000 for 2023. The deduction for your contributions to employees’ SEP-IRAs isn’t limited by the deduction ceiling applicable to an individual’s own contribution to a regular IRA. Your employees control their individual IRAs and IRA investments, the earnings on which are tax-free.

There are other requirements you’ll have to meet to be eligible to set up a SEP. Essentially, all regular employees must elect to participate in the program, and contributions can’t discriminate in favor of the highly compensated employees. But these requirements are minor compared to the bookkeeping and other administrative burdens connected with traditional qualified pension and profit-sharing plans.

The detailed records that traditional plans must maintain to comply with the complex nondiscrimination regulations aren’t required for SEPs. And employers aren’t required to file annual reports with IRS, which, for a pension plan, could require the services of an actuary. The required recordkeeping can be done by a trustee of the SEP-IRAs — usually a bank or mutual fund.

SIMPLE Plans

Another option for a business with 100 or fewer employees is a “savings incentive match plan for employees” (SIMPLE). Under these plans, a “SIMPLE IRA” is established for each eligible employee, with the employer making matching contributions based on contributions elected by participating employees under a qualified salary reduction arrangement. The SIMPLE plan is also subject to much less stringent requirements than traditional qualified retirement plans. Or, an employer can adopt a “simple” 401(k) plan, with similar features to a SIMPLE plan, and automatic passage of the otherwise complex nondiscrimination test for 401(k) plans.

For 2023, SIMPLE deferrals are up to $15,500 plus an additional $3,500 catch-up contributions for employees ages 50 and older.

Contact us for more information or to discuss any other aspect of your retirement planning.

© 2023

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