Simple Retirement Plans For Small Businesses – Accountants are always looking for smart ways to help their small business clients save on income tax. Some procedures are more difficult than others, but others are easy. Another area to consider that offers the most potential for tax savings is the money in the client’s retirement plan.
If they don’t, accountants are well equipped to help their client start a project. If your client has one, now is the perfect time to pull it out and review it. It is important not only to ensure that consumers increase their contributions, but also to increase their tax revenue. In other words, are they on the right track? This is an important question because it is often ignored.
Simple Retirement Plans For Small Businesses
If your client has taxable income of $100,000 or more and you can’t find other deductions, perhaps a review of their retirement plan may reveal some tax-saving gems. While they may be increasing their current plan’s contributions, you need to assess whether their current plan is compatible with their tax and savings needs. Time is of the essence as most of these tax saving methods must be done before the end of the year. Another option, often overlooked, is the Single-Participant 401(k).
Small Business Retirement Plan Options
Sole business owners with no legal employees, other than a spouse, who have a SEP, SIMPLE, or profit sharing plan, can benefit more than an Individual 401(k) plan. This plan can allow your client to expand their retirement nest egg while avoiding more taxes given the same income tax rate.
The chart below shows some examples. In Example 1, the owner is over 50 and can take advantage of the catch-up age. Examples 2 and 3 are shown without touch-up. The catch-up is an additional $6,000 for people over age 50 in a Single-Participant 401(k). Example 3 shows a corporation using W-2 income, such as a Single-Participant 401(K) that can be used by businesses formed as a sole proprietorship, partnership or corporation. The mathematical process for determining the maximum One-Participant 401(k) contribution for a sole proprietor is more complex than that for a business with a corporate structure.
The maximum account contribution for a Single-Participant 401(k) participant is $54,000 for 2017. If the participant is age 50 or older, they can make a catch-up contribution of $6,000 for a total amount of $60,000 to their account. But what if you need more tax savings for your small business clients? This is where a customized assistance program for the small business owner may be appropriate. Simply put, a defined-benefit plan is a type of retirement plan that allows your clients to make maximum contributions of $100,000 or more. A defined benefit plan can be included in the Participant’s 401(k) where the owner can contribute more than $200,000. If your small business clients are busy growing their businesses and have little money saved for retirement, combining a Participant’s 401(k) with a defined plan- benefit can help your client claim more than $2,000 in W-2 income over 10 years.
The chart below provides examples of how much your client can contribute to a defined benefit plan based on their age and income. This is in addition to the contributions they can also make to a Single-Participant 401(k).
The Best Retirement Plans Of 2023
Source: Dedicated Defined Benefit. This chart makes the following assumptions: retirement age — the last age 62 or five years of participation in the plan; business start date – Jan. 1, 2016; entity type — corporation; Contributions may be different for individual owners; income type — W-2.
A Single-Participant 401(k) solution is often overlooked for small business clients without legal staff. Combined with a defined benefit plan, this can allow your client to significantly lower taxes while simultaneously building their retirement nest egg.
If your client already has a retirement plan but needs additional tax deductions, you may want to consider reviewing and modifying their retirement plan for a more tax-deductible retirement plan given the same level of compensation. For clients with full-time legal professionals who do not qualify for a Single-Participant 401(k), similar options can be used using a combination of a safe-haven 401(k) and a defined-benefit plan. All Offices and Departments of The Milford Bank will be closed on Monday, Feb. 20 in recognition of the President’s Memorial Day. Electronic services- ATMs, Internet Banking, Mobile Banking and Telephone Banking are available for your convenience.
Providing access to retirement plans can help you and your employees invest in their future. It can also result in benefits for your business. What type of retirement plan should you offer?
Personal Finance: Another Perspective
Investment and insurance products and services offered through INFINEX INVESTMENTS, INC. Member of FINRA/SIPC. TMB Financial Solutions is a trading name of The Milford Bank. Infinex and The Milford Bank are not affiliated. The products and services available through Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations of or guaranteed or insured by any bank or bank affiliate. These products are subject to investment risk, including loss of value.
Links to third-party sites are provided for your convenience only. These websites are not under The Milford Bank’s control and may not follow the same privacy, security, or accessibility practices as The Milford Bank. Milford Bank does not endorse or guarantee any offers from third party providers, and Milford Bank is not responsible for the security, content or availability of any third-party sites, or their affiliates. As a small business owner, you should be thinking about some type of retirement savings for you and your employees. In this competitive work environment, having a retirement plan for your current or future employees can help attract and retain better support. Some important considerations when choosing the best retirement plan for your situation include:
Although these options are “easy”, there are other methods and rules involved. Consult your tax professional for more information. And as always, you can discuss the strategy and goals of each of these solutions with your Wyoming SBDC Network business advisor. Make an appointment today and start saving for your future.
About the Author: Cindy has been helping Wyoming entrepreneurs start or develop their businesses for the past 16 years. An entrepreneur himself, he continues the challenge of understanding each business and business owner and helping them succeed. Currently the owner of several rental properties, he owns several other small businesses, including a popular newspaper ad, a transcription service, and a stained glass studio.
Salary Reduction Simplified Employee Pension (sarsep) Plan
All Wyoming SBDC Network programs and services are provided to the public without discrimination. Special accommodations for people with disabilities will be made if requested two weeks in advance. Language assistance services will be provided to customers with English proficiency. Contact: Jill Kline at (307) 766-3405 or [email protected] Funded in part through the U.S. Cooperative Agreement. Small Business Administration. Prepare questions about SIMPLE, SEP, and single 401(k) retirement account plans on the FINRA Series 6 and Series 7 Questions. Keep reading
If you are studying for the FINRA Series 6 or Series 7 exam, you should learn about the different types of retirement plan accounts. A retirement account may be an individual plan managed by the participant or the participant’s agent, such as an investment firm or bank trust. Or it may be employer-sponsored, meaning it is organized and managed by the employer of the unit owner.
Private employers of any size and structure, from a large C corporation to a self-employed sole proprietorship, can set up and operate an employer-sponsored retirement plan. For small business owners, retirement plans offer significant tax benefits and can help attract employees. Because there are a number of retirement plans available to small businesses, it’s important to understand the features of each option. The three plans that small businesses often choose are individual 401(k) plans, SEP plans, and SIMPLE plans.
A business owner can open a solo 401(k) if the business does not employ others. A business owner creates a 401(k) plan like any other employer. Then, as an employee, the owner opens a 401(k) account within that plan.
How Much Does A 401(k) Cost Small Business Employers?
Employee and employee contributions can be made to the same 401(k). The maximum employee contribution is similar to other 401(k)s. Beginning in 2022, the limit is $25,000 per year, with a $650 take-out contribution for those age 50 and older. As an employer, the maximum annual contribution is 25% of what the owner pays himself. Combined annual contributions (employee and employer) cannot exceed $61,000.
A business owner is allowed to employ his wife and still use another 401(k) plan. Spouses can open their own 401(k) accounts using the same business 401(k) plan. A solo 401(k) can be created if the business is set up as a partnership, LLC, or sole proprietorship. People who are self-employed before starting a business can also create one
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