How Small Business Owners Can Boost Their Retirement and Save on Taxes
If you’re running a new business that’s still trying to create a steady cash flow, you may think that it’s too early to start a retirement plan. In fact, setting up a small business 401(k), SEP IRA or SIMPLE IRA can help reduce both your personal and business taxes and allow you to reinvest into your business rather than giving more cash to the IRS.
Personal Tax Benefits
As with traditional 401(k) contributions, contributions into a qualified small business retirement plan are tax-deferred. This means that you won’t pay taxes on this income now but instead will pay taxes when you withdraw the money in retirement (and hopefully are in a smaller tax bracket). This includes both contributions made as an employee and any contributions received from the employer (even if you’re the employer).
If you use a small business 401(k) and are in a low tax bracket, you may wish to use a Roth option to pay taxes now and have tax-free withdrawals in retirement. SEP and Simple IRAs don’t have Roth options, but because they’re treated as IRAs, you can immediately convert your contributions to a Roth IRA if you desire.
If your AGI is $63,000 or less (for 2018), you may also be eligible for the Saver’s Credit on up to 50 percent on the first $2,000 of your contributions.
Business Tax Deductions
Any employer contributions that you make are deductible just as you would deduct regular wages. Furthermore, administrative costs, such as monthly plan fees, that you pay as the employer are generally deductible business expenses.
Business Tax Credits
Eligible employers can also claim a tax credit for the costs to start a retirement plan in each of the first three years you have a retirement plan. An eligible employer generally has 100 or fewer employees. However, you must have employees other than yourself, so solo 401(k)s and other solo options aren’t covered.
The credit is the smaller of $500 or half of your ordinary and necessary eligible startup costs. Startup costs include setup fees, administration fees and costs to educate your employees about your plan.
While the business tax credit may be small, it still stacks with your personal and business tax deductions. This allows you to cover your retirement plan costs while still freeing up cash you were spending on taxes so that you can continue to grow your business.