There are many different types of income deferral plans available. These allow business owners to put money away for income or tax deferrals. Some options even pay both you and your employees. When you invest in your employees’ financial security you build good will too. Plan ahead for retirement contributions for tax savings to work for you. It’s important to get a strategy in place now for benefits with next year’s tax returns. The right plan for you depends on your income and situation.
Consider the following:
SEPs offer tax deductions for contributions
Self-employed individuals and employers can set up a simplified employee pension (SEP) IRA plan. This allows the employer to take a tax deduction for contributions made to each eligible employee’s account. This includes the owner. To get tax benefits you need to set up a traditional IRA to to deposit SEP monies into. This can be as much as 25% of wages or $61,000. This plan is really good for high income years where you don’t want or need all the money you’ve earned and would like to defer tax obligations.
Traditional IRAs defer taxes
With a traditional IRA, you pay taxes on the distribution, meaning, when you withdraw money out of the account it’s considered income and taxed at that time. The maximum annual contribution is $6000 or $7000 for those 50 or older. You can contribute to these accounts as long as you have earned income. Withdrawals are permitted without penalty beginning at age 59 ½. The advantage of leaving money in longer, say until you’re 65 or 70, is you have more time to increase the accounts value through compound interest during additional investment years.
SIMPLE employer-provided retirement plan
This is an abbreviation for Savings Incentive Match Plan for Employees. The administration rules are simpler and less costly than the better known 401(k) because it’s not subject to ERISA and the regulations that come with it. Annual contributions are capped at $14,000, or $17,000 for those over 50. It’s a good option if you have multiple employees and don’t want to incur the costs of setting up a 401(k).
401(k)s deduct money from employees’ paycheck pre-tax
These are more difficult to set up than the other plans, so wind up being more costly. The contribution limit is $20,500 for 2022 or $27,000 if you’re 50 or older. That’s just the employee contribution and does not include an employer match. It is flexible in what you can do with it for high income earners. For example it permits a safe harbor 401(k). The contribution limit $58,000 for 2021; $64,500 for 50 and older in 2021. No government insurance covers assets held in these accounts, so it’s generally wise to roll the assets over to a new plan when you switch jobs.
If you’re employer looking for better incentives to keep valued employees that save you money in taxes, these plans are worth considering. It’s wise for business owners to make plans that set aside money for retirement too. Understanding the different options will help you decide what’s best for you. No matter your situation, it makes a lot of sense to create a good plan around retirement contributions for tax savings. Why wouldn’t want to help you and your employees owe less to Uncle Sam?