The existing retirement plan regulations present significant chances for making tax-deductible contributions. For example, self-employed individuals can set up a SEP-IRA, allowing them to contribute up to 20% of their self-employment income, up to a maximum of $69,000 in 2024. Likewise, for those employed by a corporation, they can direct up to 25% of their salary into their account, subject to the same maximum contribution threshold.
Other Possibilities
There are more small business retirement plan options, including:
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 situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older.
Watch the Calendar
Thanks to a modification introduced by the 2019 SECURE Act, qualified employee retirement plans with tax advantages, excluding SIMPLE-IRA plans, are now eligible for adoption by the due date (including extensions) of the employer’s federal income tax return for the adoption year. Consequently, the plan can accept deductible employer contributions made by this deadline, and the employer can claim these contributions as deductions on the return for the adoption year.
It's crucial to note that this provision doesn't alter the deadline for establishing a SIMPLE-IRA plan, which remains October 1 of the year the plan is intended to take effect. Additionally, the SECURE Act amendment doesn't supersede rules mandating certain plan provisions to be active during the plan year, such as those governing employee elective deferral contributions (salary-reduction contributions) in a 401(k) plan. These provisions must be in place before such employee elective deferral contributions can be initiated.
For instance, if you're a sole proprietorship business using the calendar year for tax purposes, the deadline for establishing a SEP-IRA for the 2023 tax year, when extending your 2023 tax return, is October 15, 2024. Likewise, the deadline for making contributions for the 2023 tax year is also October 15, 2024. For the 2024 tax year, if extending your 2024 tax return, the deadline for establishing a SEP and making contributions is October 15, 2025. However, to make a SIMPLE-IRA contribution for the 2023 tax year, the plan must have been established by October 1, 2023, making it too late to set up a plan for the previous year.
While you have the option to postpone establishing a tax-favored retirement plan for this year until next year (excluding a SIMPLE-IRA plan), there's no need for delay. Incorporate it into your tax planning for this year and commence saving for retirement.
Contact Us
We're available to provide more information on small business retirement plan options. Remember, if your business employs others, you may also be required to make contributions for them. Feel free to reach out by scheduling a meeting with your VAAS Tax Consultant. We look forward to working with you.