How setting up a retirement plan can help SAVE your small business thousands of dollars in 2021

Were you ever thinking about setting up a retirement plan for your business but gave up on it because you could not understand all the nuances and needed to consult a tax pro first? . I am not here to bore you with all the details of a Roth IRA vs Traditional IRA. As your one stop shop strategic accountant, my job is to simplify the tax code and help you understand what will work best for your business. If you are self-employed like most of my clients then you can take advantage of something known as the Retirement Savings Credit, which provides up to $2,000 for singles and $4,000 for married filing jointly. Contributions can be made to any type of plan including: ROTH IRA, Traditional 401(K) and SIMPLE IRA’s. If you want to skip reading this entire article and want a one sentence summary, then here it is: all contributions regardless of level of income to a retirement plan are 100% tax deductible. You will essentially decrease your taxable income and massively reduce your tax liability.

There are different contribution limits for each type of retirement plan, nevertheless you can keep making contributions even if you are over the limit, but you cannot take a tax deduction. In addition, any contribution made to the IRA retirement plan must be from “earned income” – this means that if majority of your income comes from interest, dividends, income, or rental property then you do not qualify. Another key tax implication that you must keep in mind is that if you decide to convert from a Traditional IRA to a Roth IRA or any other retirement plan then the amount that is converted is fully taxable. Education Savings Accounts can also be a a boomerang for people in the middle class or below. For instance, if you have an employee making $50,000/year, this will allow your employee to contribute $2,000 dollars each year and then withdraw the money TAX FREE  to fund their kids’ education.

If you are in the position of setting up and enrolling your employees in a SEP (Simplified Employee Plan) or a SIMPLE IRA plan, then there is some great news. You can take a tax credit of up to $500 per year for three years – this means a net savings of $1,500. From my experience working at Deloitte as a pension plan auditor, Traditional 401(k) plans seem to be the best bet for business owners with less than 100 employees. Combining the 401(K) plans with a Profit-Sharing Plan can produce a bigger tax deduction and end up saving you thousands. For instance, if you have an employee over 50 years of age then the employee can contribute up to $24,500 to the 401(K)and $24,500 to a PSP.

Let us examine another situation, let us say that you are a gym owner of Fit Bodies Gym and you are in the 35% income bracket. Let’s also say that your company Fit Bodies contributes $8,000 a year in a 401(K) plan, that contribution is not income to you as the business owner. You will end up SAVING instead of owing $2,800 (35% * 8,000) in income taxes. 

Sources: Publication 590-A (2020), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service (

How can I help you SAVE more and REDUCE your taxes? Let’s connect now!