S Corp Retirement Plan Options – If you own an S company, you have several options. In today’s post, we’ll explain five key options to get you thinking about what’s best for your company and your future.
The two most common types of retirement accounts are IRAs and 401(k)s. S corporation owners can choose between these two types, and this post will explain both.
S Corp Retirement Plan Options
The two types of IRAs most commonly used by S corporation owners are traditional IRAs and Roth IRAs. These types of accounts have a few things in common, so we’ll discuss them first, then tell you what the differences are and how they apply to your taxes.
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Both Traditional and Roth IRAs can be opened by almost anyone with taxable income, and an account can be opened with a bank, brokerage or other financial institution. As an employee shareholder of an S corporation, you can contribute your income to these accounts, but not the dividends you receive from the company.
If you’re under age 50 in 2022, you can contribute up to $6,000 per year combined in all traditional and Roth IRAs. The Roth IRA is with you.
One important thing to note is that taking money out of your retirement plan before you turn 59.5, whether it’s an IRA or 401(k), is called an early distribution. An additional 10% tax applies unless you withdraw contributions from a Roth IRA. There are some very specific exceptions to this additional tax, but you shouldn’t resort to early withdrawals if they can help.
Oh, and another fun thing to note (we use the term fun loosely here) is that contribution deadlines for IRAs and 401(k)s are usually not until next year’s tax deadline. So, if you want to take advantage of the tax benefits by creating retirement benefits for your 2021 taxes, you actually have until April 15, 2022 to do so.
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Alright, let’s look at some of the differences between the two most common IRAs. The biggest difference between a traditional IRA and a Roth is that with a traditional IRA, you don’t pay taxes until you withdraw the funds. This is a good strategy and retirement account to use if you believe you will be in a lower tax bracket than you are now when you retire.
When you contribute to a traditional IRA, your annual contributions are deducted from your taxable income, so you may qualify for a tax break when you contribute. However, the deduction may be waived (reduced) or waived if you or your spouse are enrolled in retirement benefits through employment. This will depend on your filing status and income.
Another key difference is that traditional IRAs start at age 72 with minimum withdrawals. This means that you must make taxable withdrawals from your account each year.
The biggest difference with a Roth IRA is that instead of deferring tax payments until after you retire, you actually pay your taxes upfront and put your after-tax dollars into your Roth IRA. This could make a Roth IRA a better option for those who expect to be in a higher tax bracket when they retire than they are now.
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Another difference is that your Roth IRA contributions are limited (stopped or completely eliminated) based on your income and contribution status. For example, in 2022, the amount you can donate will start to decrease once you submit your address.
Unlike traditional IRAs, when your money is in a Roth IRA, you can take tax-free and penalty-free withdrawals on your contributions (but not your income!) and there are no minimum distribution requirements regardless of age.
Now that we’ve talked about the two most common IRAs, there’s another type of IRA you should put on your radar. Instead of employees setting up their own IRAs, employers set up SEP-IRAs for them. This type of plan can be created by businesses of any size, including self-employed people.
The SEP-IRA allows you as an S corporation owner to create a retirement account that allows you to contribute up to 25% of each employee’s salary (including your own!) into the account (up to the maximum amount set by the IRS). . And when you own and rent, it can be an effective way to limit the amount you pay in self-employment tax.
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For example, if you pay yourself a salary of $75,000 and contribute 25% of your paycheck to your SEP-IRA, you only pay self-employment taxes on $56,250. Also, contributions to the SEP -IRA can be deducted from business tax returns, which lowers the company’s federal tax bill.
Other advantages of setting up a SEP-IRA include ease of creation, low administrative costs, and flexibility in how much employers contribute. Also, our employees always have ownership of their money as it is always 100% kept in their account.
One important thing to remember about this type of IRA is that employers must provide equal percentage compensation to all eligible employees. Like traditional IRAs, SEP-IRAs require minimum withdrawals starting at age 72.
An added bonus to this choice is that you can contribute to your SEP-IRA as an employer, and you can also contribute to a Traditional IRA or Roth IRA as an employee.
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Another IRA available to small businesses (less than 100 employees) is the SIMPLE IRA. Under this plan, employees pay pre-tax contributions up to a maximum amount set by the IRS. Employers can match this contribution up to 3% of an employee’s salary or establish a non-optional 2% contribution for each eligible employee.
If you own a SIMPLE IRA as an S corporation owner, you can make pre-tax contributions as an employee and deduct those contributions as an employer.
Similar to SEP-IRA creation, the advantages of setting up a SIMPLE IRA are ease of creation and low administrative costs. Also, our employees always have ownership of their money as it is always 100% kept in their account.
However, the SIMPLE IRA’s early withdrawal penalty is an additional 25% tax for early withdrawals (before age 59.5) in the first two years of opening the account, but an additional 10% tax thereafter, so the early withdrawal penalty is higher. It’s heavy. Then. Like traditional and SEP-IRAs, SIMPLE IRAs require minimum withdrawals starting at age 72.
K Business Financing
Single-participant 401(k)s are exactly what you might think based on the title: 401(k) Plans for Unemployed Business Owners (Excluding Spouses). Also known as Solo 401(k), Solo-k or Uni-k.
A single-participant 401(k) is a traditional 401(k) with the same rules and requirements as any other 401(k). For S corporation owners, this means you contribute to employees and employers (including you!) contribute to employers up to the maximum amount set by the IRS.
The benefit of a single-participant 401(k) is that you can make after-tax Roth IRA contributions. However, starting at age 72, you must make a minimum distribution in one participant’s 401(k).
To help categorize the 5 types of retirement plans we’ve discussed today, I thought I’d summarize them in a nice chart. We hope this information has been helpful and motivated you to start planning for your financial future.
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If you have any questions about your retirement plan, please contact our experts to help you solve all your problems. If you found this article helpful, please take a moment to check out our other posts we’ve written for S business owners like you. Helping Small Businesses Choose the Right Employee Retirement Plan A CPA can help business owners understand the many options available to them. Jimmy J. Williams, CPA/PFS
Retirement plans offer significant tax benefits to small business owners and give them and their employees an incentive to save for the future. There are several types of retirement plans available to small businesses, each with unique requirements and limitations. The same plan is not necessarily ideal for companies of all sizes and ownership structures, so small business owners should consider before making a decision.
A CPA can help business owners choose and implement the plan that’s best for them. The business owner’s retirement goals, how the business is set up (sole proprietorship, limited liability company, C corporation, or S corporation), and number. staff, etc. We can also help you understand the legal and compliance issues associated with each type of plan and the tax benefits that may arise from it.
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