Establishing a Tax-Favored Retirement Plan: A Strategic Move for Your Business

For businesses without an existing retirement plan, now presents an opportune moment to consider implementing one. Current retirement plan regulations offer substantial opportunities for tax-deductible contributions, making it a prudent financial decision.

One attractive option is the Simplified Employee Pension Individual Retirement Account (SEP-IRA), particularly beneficial for self-employed individuals. With a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum annual contribution limit of $69,000 for 2024, representing a notable increase from the previous year. Similarly, if you're employed by your own corporation, you can contribute up to 25% of your salary, also capped at $69,000. For individuals in the 32% federal income tax bracket, maximizing contributions could lead to significant tax savings, potentially reducing tax liabilities by a substantial margin.

Alternative retirement plan options cater to diverse business structures and needs. These include 401(k) plans, which can be established for solo entrepreneurs (commonly known as solo 401(k)s), defined benefit pension plans, and SIMPLE-IRAs. Contribution limits vary depending on the plan type and individual circumstances. For instance, in 2024, participants in a 401(k) plan can contribute up to $23,000 annually, with an additional $7,500 "catch-up" contribution permitted for individuals aged 50 or older.

Timing is crucial when establishing tax-favored retirement plans, with recent legislative changes affecting adoption deadlines. Under the 2019 SECURE Act, qualified employee retirement plans, excluding SIMPLE-IRA plans, can now be adopted by the due date (including extensions) of the employer's federal income tax return for the adoption year. Notably, this change does not alter the deadline for establishing SIMPLE-IRA plans, which remains October 1 of the plan year. Compliance with specific plan provisions, such as those governing employee elective deferral contributions, is essential for ensuring plan effectiveness.

For businesses operating on a calendar tax year, the deadline for setting up a SEP-IRA for the 2023 tax year, with associated contributions, is October 15, 2024, if an extension is filed. Similarly, for the 2024 tax year, the deadline extends to October 15, 2025. However, for SIMPLE-IRA plans, the deadline for plan establishment is October 1 of the plan year, with contributions for the 2023 tax year already closed.

While deferring retirement plan establishment until the following year is an option, taking action now offers immediate benefits, aligning with effective tax planning strategies and accelerating retirement savings. For comprehensive insights into small business retirement plan options and considerations, we stand ready to provide tailored guidance, ensuring informed decision-making aligned with your business objectives. It's important to note that if your business employs individuals, contribution requirements for employees should be factored into the planning process.