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June 9, 2024

Tax-Favored Retirement Plan Options for Business Owners

Does your business have a retirement plan? If not, it might be the right time to get one. Right now, retirement plan rules allow for significant tax-deductible contributions.

If you’re self-employed and set up a SEP-IRA, for example, you could contribute up to 20% of your self-employment earnings with a maximum contribution of $69,000. (That’s a $3,000 increase from 2023).

If you’re employed by your own corporation, you can contribute up to 35% of your salary to the account with a maximum contribution of $69,000. If your income falls within the 32% federal income tax bracket, making a maximum contribution could decrease what you owe for 2024 by a hefty $22,080 (32% x $69,000). 

Small business retirement plan options

You also have other small business retirement plan options to consider: 

  • 401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
  • Defined benefit pension plans

These plans may provide bigger or smaller deductible contributions than a SEP-IRA, depending on the circumstances. As an example, a participant can contribute $23,00

Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older.

Deadlines to keep in mind for SIMPLE-IRA plans

After a change made by the 2019 SECURE Act, many tax-favored qualified employee retirement plans may be adopted by the due date of the employer’s federal income tax return for the adoption year. (This excludes SIMPLE-IRA plans.) Then, the plan can receive deductible employer contributions made by the due date (including any extension.) The employer may deduct them on the return of the adoption year.

It’s worth noting that this provision doesn’t change the deadline to establish a SIMPLE-IRA plan. That is still October 1 of the year for which the plan is to take effect. The change to the SECURE Act also doesn’t override rules that require certain plan provisions to be made during the plan year. (For example, provisions that cover employee elective deferral contributions under a 401K plan. Such employee elective deferral contributions can only be made if the plan is in existence prior.

If you extended your 2023 tax return, October 15, 2024, is the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year. In this case, October 15, 2024, is also the deadline for making a contribution for the 2023 tax year.

If you extend your 2024 tax return, the deadline for setting up a SEP and making a contribution for the 2024 tax year is October 15, 2025.

However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year.

Questions? Smolin can help

It’s possible to delay until next year to establish a tax-favored retirement plan for this year (with the exception of a SIMPLE-IRA plan). But why wait? 

Tackle it this year as part of your tax planning, and start saving for retirement. Your accountant can provide more information on small business retirement plan options. If your business has employees, be aware that you may have to make contributions for them, too.

Contact your Smolin accountant for more information.

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