Last-Minute Retirement Deductions for 2024
Audio version available here (2 min. 15 sec.)
As you begin end-of-year procedures for your business, an area you might not initially think about is retirement. However, retirement planning is crucial, and it will be something you regret if you end up with little to no savings by the time you retire later in life. Luckily, there is still time to get your retirement plan in the works before the end of 2024, and if you do it right, a nice tax deduction awaits as well.
The first step is to establish a retirement plan if you haven’t yet. According to Forbes, “over eight out of 10 small businesses have no employees”. If this is the case for your business, you are in luck. As the business owner and sole employee, you can enjoy both the employer and employee contributions towards a defined contribution plan, such as a 401(k). This will allow you to both save up quite a bit for retirement in one go and earn a significant tax deduction.
If you are not the sole employee for your company, there are other options for tax savings. This one applies to businesses which are in their start-up phase. Before the end of 2024, you can establish a new qualified retirement plan, a SIMPLE IRA, or a SEP plan. You can then qualify for an up to $5,000 non-refundable tax credit that can be claimed over three years, totaling out at $15,000 maximum. The credit is based on start-up costs relating to “the establishment or administration of an eligible employer plan, and the retirement-related education of employees with respect to such plan”.
Starting 2023, a new credit was established by SECURE 2.0. It is the Small Employer Pension Contribution Tax Credit, which allows you to claim up to 100% of an employer contribution, capped at $1,000 per employee. The catch is that you can only claim 100% of the contribution the first year. Every year after will have the credit phase out until you hit the sixth year of implementation, when it will run out. There are other limits to this credit, so be sure to talk with your tax professional before claiming it.
Another SECURE 2.0 credit is the Automatic-Enrollment Tax Credit, which is $500 per year for up to three years, beginning the year you, as the employer, “include an automatic contribution arrangement in a qualified employer plan”.
When considering these retirement plans and their potential tax deductions and credits, it’s vital that you are fully aware of the limitations and future tax implications. There is a lot of information out there that can be overwhelming, so to make it easier on yourself, you should speak with a tax and retirement professional. With the right guidance, you can maximize both your retirement and tax savings while putting your business in the best position. To speak with an expert, just give XQ CPA a call. We would love to help you.
Phone: 832-295-3353
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Want to pay less taxes? Read XQ CPA's official tax planning guidebook! How to Grow Your Wealth Through Tax Planning.
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