Does your business have a retirement plan? If not, now might be a the right time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions and Rudler is here to help you and your business select the plan that fits best.
For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $61,000 for 2022. If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $61,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2022 by a whopping $19,520 (32% times $61,000).
More options
Other small business retirement plan options include:
- 401(k) plans, which can even be set up for just one person (also called solo 401(k)s),
- Defined benefit pension plans, and
- SIMPLE-IRAs.
Depending on your circumstances, these other types of plans may allow bigger deductible contributions.
Deadlines to establish and contribute
Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year.
Important: The SECURE Act provision did not change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change does not override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made.
For example, the deadline for the 2021 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 17, 2022, if you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also October 17, 2022. However, to make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by October 1, 2021. So, it’s too late to set up a plan for last year.
Sure, you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), but why wait? Get it done this year as part of your tax planning and start saving for retirement. Contact your Rudler, PSC advisor at 859-331-1717 and we can provide more information on small business retirement plan alternatives. Keep in mind that if your business has employees, you may have to make contributions for them too.
RUDLER, PSC CPAs and Business Advisors
This week's Rudler Review is presented by Evan Kandra, Staff Accountant and Audrey Goetz, CPA, CVA.
If you would like to discuss your particular situation, contact Evan or Audrey at 859-331-1717.
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