How to Maximize Your Retirement and Save on Taxes
How to maximize your retirement savings
If your business doesn’t already have a retirement plan, now might be a good time to take the plunge. Current retirement rules allow for significant tax-deductible contributions.
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 the IRS (for 2022) by $19,520 (32% x $61,000).
Establish a tax-favored retirement plan
Small business retirement options include:
401k plans
Solo 401k
SEP IRA
Defined benefit pension plans
SIMPLE-IRA
Depending on your circumstances, these other types of plans may allow bigger deductible contributions. They can also minimize your responsibility as a small business owner to have to contribute to your employees retirement plan.
SIMPLE IRA vs. 401K
A SIMPLE IRA allows a business owner to contribute $14,000 + 3% of their salary to their retirement account. This type of retirement account allows the employee to contribute to their own SIMPLE IRA account, but does not hold the employer liable to contribute towards the employees account.
With a 401K account an individual can contribute a larger percent of their salary towards retirement, which in turn can play a larger tax benefit. However, an employer must make the same retirement percent contribution to their employee’s account, as they do to their own account. For example… if you planned to contribute 10% of your salary to a retirement account, you must match that and contribute what would equate to 10% of your employees salary to a 401K account for them. This would be in addition to paying them their full salary.
Although you may want to provide these types of benefits to your employees in the long run, it can be difficult to do out of the gate. Starting up a small business comes with quite a bit of risk, and by adding employee retirement contributions into the mix, your purse strings might be feeling a bit lighter than you’d like. This is why I’ve decided to utilize the SIMPLE IRA initially while I begin to build my business and team.
Deadlines reminders to establish a retirement plan
Example: The deadline for the 2021 tax year for setting up a SEP-IRA (or 401K) for a sole proprietorship business is Oct 17, 2022 for tax purposes, IF you extend your 2021 tax return. The deadline for making the contribution for the 2021 tax year is also Oct 17, 2022.
Example: To make a SIMPLE-IRA contribution for the 2021 tax year, you must have set up the plan by Oct 1, 2021 at the latest. If you asked for a tax return extension, your SIMPLE IRA plan “set up date” does not get applied to that extension date and must still be set up by Oct 1st, 2021.
I hope that helps get you started. By talking with a licensed CPA or Financial Advisor, they can further assist you in determining what retirement plan may be best for you and your business. By leveraging an expert, you will surely be better off than without!
Wishing you all the best!
Jen
Investor // Landlord and DIYer // Realtor // Business Consultant // Globe Trotter // Converting Vegan.
