Tax Tip 3: Review and Maximize Retirement Contributions

Contributing to retirement plans is one of the most effective ways to reduce taxable income while also building a strong financial foundation for the future. Here’s how you can maximize this strategy by year-end:

• Why Retirement Contributions Help: Contributions to retirement accounts like SEP IRAs, SIMPLE IRAs, and solo 401(k)s are usually tax-deductible, meaning they lower your taxable income for the year. For business owners, this is an excellent way to retain more earnings instead of losing them to taxes, while also investing in your long-term financial security.
• Plan Options for Small Businesses:
  • SEP IRA: A SEP (Simplified Employee Pension) IRA is popular among small business owners because of its high contribution limits and flexibility. In 2024, you can contribute up to 25% of your net income (up to $66,000). SEP IRAs are easy to set up, have low administrative requirement AND you can still open one after the year ends, as long as it’s done by your tax-filing deadline.
  • SIMPLE IRA: This plan has lower contribution limits than a SEP, but it’s often suitable for businesses with employees. The limit for 2024 is $15,500, with an additional $3,500 if you’re over 50. While contributions are more modest, they can still offer substantial tax savings, and employer contributions are tax-deductible.
  • Solo 401(k): If you’re self-employed or run a business with no employees, a solo 401(k) lets you contribute both as an employer and an employee, allowing for up to $23,000 if you’re under 50 and an additional $7,500 for catch-up contributions if you’re over 50, totaling $73,500 in 2024. Solo 401(k) plans also offer the option to contribute pre-tax or post-tax (Roth), giving you some flexibility for future tax planning.
• Consider a New Plan if You Don’t Have One: If you haven’t set up a retirement plan yet, now is a good time. Retirement contributions are one of the most effective and legally sanctioned ways to reduce your taxable income. You don’t necessarily need to fund the plan by December 31, but having it established by year-end ensures you can make deductible contributions by the tax-filing deadline.
• Maximizing Contributions:
  • Aim to contribute the maximum allowed amount within your cash flow limits. This might require some budgeting, but the tax savings and retirement growth potential are well worth it.
  • Many plans allow for a range of contribution types, so you can contribute within your comfort zone while getting the best tax benefit possible.

DID YOU KNOW:

Several U.S. states have enacted legislation requiring businesses to offer retirement plans to their employees. These mandates aim to enhance retirement savings among workers, particularly in small to medium-sized businesses. The specific requirements, including employer size thresholds and deadlines, vary by state.
The table below provides an overview of states with active or upcoming retirement plan mandates:

STATE	PROGRAM NAME	EMPLOYER THRESHOLD	STATUS
CALIFORNIA	CalSavers	No limit
ILLINOIS	Secure Choice	No cap
OREGAN	OregonSaves	New or used property with a useful life ≤ 20 years
CONNETICUT	MyCTSavings	Must apply to all eligible property purchased in the year
MARYLAND	MarylandSaves	No carryover
NEW JERSEY	Secure Choice Savings Program	Federal but not always State
COLORADO	Colorado SecureSavings
VIRGINIA	VirginiaSaves
NEW YORK	Secure Choice Savings Program
NEW MEXICO	Work and $ave
MINNESOTA	Secure Choice Retirement
NEVADA	Nevada Employee Savings Trust

Note: The above information is based on data available as of November 2024. For the most current details, please refer to the respective state program websites or consult with a financial advisor.

Employers in these states are required to either enroll their employees in the state-sponsored retirement program or offer a qualified private retirement plan. Non-compliance may result in penalties, so it’s crucial for businesses to stay informed about their state’s specific requirements and deadlines.

For more detailed information on each state’s program, you can refer to resources like the A 50-state guide to state-mandated retirement plans.

Additional Tips:

1. Talk to your payroll provider: Most payroll providers integrate with retirement plan platforms, making it easier to:
   • Transmit employee data and contribution amounts directly to the plan provider.
   • Synchronize plan changes (e.g., enrollment or changes in deferral rates) with payroll systems.
   • Generate compliance reports for IRS or Department of Labor requirements.
2. Consult with a Financial Planner: They can help ensure you’re making the most of your plan options, especially if you have employees or complex finances.
3. Catch-Up Contributions: If you’re over 50, remember to take advantage of the higher limits allowed for catch-up contributions, which offer even more potential tax savings.

Maximizing retirement contributions is one of the most powerful ways to achieve a dual goal: saving on taxes now and building a secure financial future.