Tax Deductions for Small Business Owners and Retirement

There are several strategies you can implement before December 31 to help fund the retirement you envision and reduce your current tax liability.

Five essential strategies for deductions for self-employed business owners and entrepreneurs seeking to increase their retirement savings:

 

Establish a Retirement Plan for 2024

Do you have a retirement plan in place for yourself or your business? If not, it’s crucial to set one up before the end of the year. Establishing a retirement plan, such as a 401(k), SEP IRA, or another qualified plan, allows you to make both employee and employer contributions, providing significant opportunities for tax deductions.

As the business owner, you have the flexibility to contribute to your plan as both the employer and the employee, enabling you to put more money into your retirement account while lowering your taxable income for 2024.

Claim the Retirement Plan Start-Up Tax Credit (up to $15,000)

If you’re establishing a new retirement plan, you may be eligible for a start-up tax credit to help offset the costs of setting up the plan.

The credit can be as high as:

• $500, or
• The lesser of $250 per non-highly compensated employee or $5,000.

This credit applies to the costs associated with plan setup and administration, as well as any retirement education provided to employees. This is a great opportunity to reduce the financial burden of launching a new plan while also benefiting from tax savings.

Apply for the Small Employer Pension Contribution Credit

The SECURE 2.0 Act, passed in 2022, introduced a new tax credit for small employers contributing to their employees’ retirement plans. If you offer a retirement plan and make contributions on behalf of your employees, you can claim a credit of up to $1,000 per employee.
The credit starts at 100% of your contribution in the first year, then gradually decreases over the next few years. For example, in the second year, you’ll receive 75% of your contribution, and so on. This can add up to significant savings, especially for employers with a smaller workforce.

Take Advantage of the Automatic Enrollment Credit (up to $1,500)

If you’re setting up or modifying a retirement plan, consider including an automatic enrollment feature.
The SECURE Act provides a $500 per year credit for up to three years for businesses that add this feature to their 401(k) or SIMPLE IRA plans. This credit is available for both new and existing plans, and you don’t need to spend money to qualify—just implement the automatic enrollment, which gives employees the option to opt out.

This credit can help reduce your overall costs while encouraging higher employee participation in retirement savings

Consider Converting to a Roth IRA

If you have funds in a traditional IRA or 401(k), converting them to a Roth IRA might be a smart move, depending on your financial situation. While you’ll have to pay taxes on the amount you convert, a Roth IRA offers several long-term advantages:

• Tax-free withdrawals. Once your Roth IRA has been open for at least five years, you can make tax-free withdrawals after age 59½.
• No Required Minimum Distributions (RMDs). Unlike traditional IRAs, Roth IRAs do not require you to take minimum distributions starting at age 73, which allows your funds to continue growing tax-free for longer.
• Penalty-free access to contributions. You can withdraw the money you contributed to a Roth IRA at any time without tax or penalties.
  Converting to a Roth IRA can be an excellent strategy for reducing future tax liabilities, especially if you expect to be in a higher tax bracket in retirement.

Optimize Your Retirement and Tax Planning Before 2024 Ends

As the year ends, it’s important to take action now to maximize your retirement savings and tax benefits. Whether you’re starting a new retirement plan, claiming valuable tax credits, or considering a Roth IRA conversion, there are several strategies available to help you fund the retirement you want. Some plans work better for different types of businesses.

Don’t wait—take advantage of these opportunities before December 31, 2024!

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