Only 30% of small businesses offer their employees a retirement plan, meaning the majority are missing out not only on an employee retention tool, but also an important tax-savings strategy.
A well-designed retirement plan can lower your tax burden, help you compete for top talent and even pay for itself through federal credits. And thanks to SECURE 2.0, the incentives have never been stronger.
Built-in tax savings from the start
The money your business puts into a plan is a deductible business expense. Whether you’re contributing on behalf of your employees or getting started with a plan for yourself, those dollars are reducing what you owe at tax time while building financial security for the years ahead. And as a plan participant yourself, your own contributions come directly off your taxable income.
Profit-sharing contributions also give you breathing room in how much you contribute. You can base your contributions on how the year went — more in a strong year, less in a slower one — which makes a retirement plan a realistic option even when cash flow is unpredictable.
The advantages keep adding up
Depending on how your plan is structured, there are several ways that you and your employees can save on taxes:
- You may deduct matching contributions. Every dollar you contribute as an employee match reduces your own taxable business income.
- A Roth 401(k) protects employees from potential tax increases. Employees contribute after-tax dollars to a Roth 401(k). Their savings grow tax-free and can be withdrawn tax-free in retirement.
- Your plan can double as a cash resource. If your plan permits it, participants can borrow against their balance without triggering taxes or penalties, as long as the loan is repaid on schedule.
- Smaller teams have options, too. If a full 401(k) isn’t the right fit, SEP-IRAs or SIMPLE IRAs are easier to set up and still provide the same deductions and benefits.
Beyond the tax advantages, a 401(k) with a match can be just as enticing as a generous salary. A retirement plan shows current employees and prospects that you are invested in their financial wellness, encouraging them to stick around.
Uncle Sam wants you to offer a plan
The federal government offers credits to incentivize small businesses to make retirement savings more attainable for their employees. If your business has 100 or fewer employees, you may be eligible to receive a tax credit of up to $5,000 a year for the first three years you have a plan in place. And unlike a deduction, a credit comes directly off your tax bill.
Plus, when you add an automatic enrollment feature for your employees, you may be eligible for an additional credit of $500 per year for the same three-year period. That’s totals up to $16,500 in potential credits just for getting started.
Not sure where to start?
At Magone & Company, we help small businesses evaluate retirement plan options as part of a larger tax strategy. If you’ve been putting this off, get in touch to explore what a plan could mean for your business and your bottom line.
This document is for informational purposes only and should not be considered tax or financial advice. Be sure to consult with a knowledgeable financial or legal advisor for guidance specific to your business situation.