If your business hasn’t embraced a retirement plan yet, now might be the perfect opportunity. The current retirement plan regulations offer generous tax-deductible contribution allowances.
For instance, self-employed individuals can establish a SEP-IRA and contribute up to 20% of their self-employment income, capped at $69,000 for 2024 (up from $66,000 in 2023). If you’re an owner-employee of a corporation, you can contribute up to 25% of your salary to your retirement account, with the same $69,000 maximum. For those in the 32% federal income tax bracket, making the maximum contribution could reduce your 2024 tax bill by an impressive $22,080 (32% of $69,000).
Other Retirement Plan Options
There are several other retirement plan alternatives for small businesses, such as:
- 401(k) plans, including solo 401(k)s for individuals.
- Defined benefit pension plans
- SIMPLE-IRAs.
Depending on your circumstances, these plans might allow for larger or smaller deductible contributions compared to a SEP-IRA. For instance, in 2024, a participant can contribute up to $23,000 to a 401(k) plan, plus an additional $7,500 “catch-up” contribution for those aged 50 or above.
Be Mindful of Deadlines
Thanks to the 2019 SECURE Act, tax-advantaged qualified employee retirement plans (excluding SIMPLE-IRA plans) can now be adopted by the due date (with any extensions) of the employer’s federal income tax return for the year of adoption. The plan can then accept deductible employer contributions made by the same due date, and these contributions can be deducted on the return for the adoption year.
Note: This provision doesn’t alter the deadline for establishing a SIMPLE-IRA plan, which remains October 1 of the plan’s effective year. Moreover, the SECURE Act doesn’t override rules mandating specific plan provisions, like those governing employee elective deferral contributions in a 401(k) plan, which must be in effect before such contributions can be made.
For instance, for the 2023 tax year, the deadline to set up and contribute to a SEP-IRA for a calendar-year sole proprietorship business is October 15, 2024, if you file an extension. For the 2024 tax year, the corresponding deadline is October 15, 2025. However, to make a SIMPLE-IRA contribution for the 2023 tax year, the plan must have been set up by October 1, 2023.
While you can postpone establishing a tax-advantaged retirement plan for this year to the next (except for a SIMPLE-IRA plan), why delay? Incorporate it into your tax planning this year and kickstart your retirement savings.
At Accavallo & Company, we can offer more details on small business retirement plan options. Remember, if your business employs others, you might be required to make contributions on their behalf as well. Reach out to your tax expert at 203-925-9600.
