As a business owner or self- employed individual you can reduce your taxes and at the same time save for retirement by implementing a Qualified retirement plan such as a SEP IRA, Simple IRA or 401k. You may also utilize a Non Qualified plan to reward key employees and top executives. Having a benefit package can help attract and retain employees.
Traditional or Roth IRA
Contribute before or after tax to a personal retirement plan. If you are under age 50 you may contribute up to $6,000 a year. If age 50 or older contribute up to $7,000 a year. Some limitations apply if your income exceeds a certain amount or you are covered by a retirement plan at your job. Consult with your tax professional to determine if this is a good option for you.
SEP or Simple IRA
A SEP IRA, or Simplified Employee Pension, can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee’s pay. Easy to set up and operate with flexible annual contributions.
A Simple IRA, or Savings Incentive Match Plan, is another popular way to save for retirement. The employer is required to contribute each year either a matching contribution up to 3 percent of compensation OR 2 percent nonelective contribution for each eligible employee. Employees may elect to contribute. The amount an employee can contribute has limitations. ($14,000 in 2022) Easy to set up but inflexible contributions.
401k with Profit Sharing
A 401k is a plan that allows an employee to defer a portion of their income from their wages to a retirement account. Generally, deferred contributions are not included in an employee’s taxable income but do become taxable when the employee begins to take withdrawals. Although there different types of 401k plans one of the most popular is a Safe Harbor 401k which requires the Employer to provide a matching contribution, which in turn, can reduce the tax burden for a business.
Elective deferrals from an employee can typically be $20,500 per year if under age 50 or $27,000 a year if age 50 or older. Employee contributions are flexible and fully vested. IRS rules and limitations can apply based on the type of 401k selected by the employer.
Note* As of June 2022, California will require a business with more than 5 employees to have a retirement plan in place or elect CalSavers. Fines will be assessed for businesses that do not comply with this law.
What is one of the best ways to attract and retain employees? Your business can offer a voluntary Benefit package. Not only will your employees be able to
support their family but they will also be able to care for them in the event of illness, disability or an untimely death.
- Disability Insurance – A Disability policy will replace a portion of an employee’s wages for a specified amount of time if they become ill, disabled, injured or pregnant
- Flexible Spending or Health Spending account – An employee may defer pre tax deductions to a FSA or HSA that can be used for out of pocket medical expenses, co pays or prescriptions. An FSA or HAS can also be used for Dependent Day Care expenses- tax free!
- Accident Insurance – In the event of an accident not work related, an employee can collect a lump sum payment depending on the type and severity of an accident
- Cancer or Critical Illness Insurance – An employee can collect a lump sum or series of payments should they be diagnosed with Cancer, suffer a Heart attack, stroke or some other debilitating disease
- Group Life Insurance – Employees can secure term or permanent life insurance for themselves or family members with little or no medical underwriting.
Offering a voluntary Benefit package to your employees brings value to your business and employees are likely to be more productive and stay