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For individuals, the foundational goal of a retirement plan is to support a comfortable life outside of the workforce. For business owners, offering retirement plans helps to support employees and meet their expectations related to benefits. These plans can also help to attract high-performing talent who bring experience and expertise to the table.

However, those are not the only reasons why retirement plans can be valuable. Retirement plan tax credits can add another advantage for both individual employees and businesses. Lowering tax exposure through these credits leads to more net income.

Getting the most out of a retirement plan is simply in your best interest. If you, or your business, already participates in a retirement plan, it only makes sense to maximize the benefits it offers.

Let’s go into more detail about retirement plan tax credits for businesses and individuals.

A sticky note reading “tax credits” sits on a calculator on a desk.

Retirement Plan Tax Credits for Businesses

Employers have many options for offering retirement plans to their employees. Examples include, but are not limited to:

  • Simplified Employee Pension plan Individual Retirement Accounts (SEP-IRAs)
  • 401(k) plans
  • Simple IRAs

These plans help employees save for retirement, and many allow the business to offer additional contributions. They can also provide valuable tax credits.

When discussing the benefits of retirement plans, it’s important to acknowledge the following advantages. If your business qualifies, you can receive a $5,000 yearly tax credit for three years if you start a retirement plan.You can visit the IRS website to see if your business qualifies.

Offering retirement plans can help attract higher-level employees and retain staff across the organization. By providing this benefit, business owners can better align with employee expectations. They also support the long-term financial security of their staff.

That said, there are also key tax benefits that can come from offering retirement plans to employees.

As a business owner, offering a traditional 401(k) can give you an option to save for your own retirement. Unfortunately, this need is very easy to overlook amidst all the responsibilities of owning and running a business.

Each contribution reduces your current tax liability by lowering your adjusted gross income, as Investopedia details. This 401(k) plan tax credit could mean moving into a lower tax bracket, meaning less taxable income overall.

IRA contributions can also be used as tax deductions. However, this may be reduced or eliminated based on your modified adjusted gross income.

For your business itself, offering such plans can also provide small business retirement plan tax credits. Examples include, but are not limited to:

SECURE Act 2.0 Tax Credits

Sometimes referred to as just SECURE 2.0 tax credits, this act is an update of federal law. It extends tax credits to smaller employers with a limited number of employees. Paychex explains that SECURE Act 2.0 small business tax credits include:

  • Companies with 50 or fewer employees are eligible for a credit. Specifically, this credit covers the total cost of administrative work for establishing a retirement plan for staff.
  • Companies with 51 to 100 employees can receive a tax credit of 50% of that same administrative cost.
  • All companies with 51 to 100 employees can earn a tax credit for employee-matching and profit-sharing contributions. These credits are time-limited to a five-year period. They are also reduced for companies with 51-100 employees.

Retirement Plan Tax Credits for Individuals

Finding opportunities to reduce your taxable income is a straightforward way to decrease tax exposure. There are a wide variety of strategies to consider. Examples include tax-loss harvesting, investing in municipal bonds, and contributing to a health savings account (HSA). Those are just a few possibilities.

As an individual, you can use your retirement plan to support two key goals:

  • Build long-term financial security that supports you after you leave the workforce.
  • Reducing your exposure to taxes, both now and in the future. 

If you’re already saving for retirement, you’re in a good position to take advantage of these tax benefits. The focus is on maximizing those opportunities to reduce taxes. The groundwork of getting into the right mindset for retirement and accounting for costs has already been addressed, at least to a degree.

Traditional individual retirement account (IRA) and 401(k) contributions are one such option. IRAs and 401(k)s allow you to defer taxes on investment income, instead of completely avoiding payment. 

However, effective tax planning can help to reduce your overall exposure in the long term. Many people earn less in retirement than they do as an active member of the workforce. That can mean a reduced tax burden when taking a distribution, even though tax is still owed on those withdrawals. 

Contributions to these accounts also lower your tax liability in each year that you make them.  When you put money into traditional 401(k)s and IRAs, you reduce your adjusted gross income (AGI). Because AGI is the basis for tax exposure, lowering AGI also lowers your tax liability.

Roth IRAs and Roth 401(k)s are funded with after-tax dollars. These accounts can be seen as providing a future retirement benefit that is tax free. You have to pay taxes upfront on the money used for contributions. That means you won’t need to pay taxes on withdrawals or distributions in the future, as long as all the rules are followed for these accounts.

Depending on your personal financial situation and long-term goals, one option may be better than another. You may even take advantage of both types of plans. It all comes down to your desired approach and plans for the future.

Maximizing Retirement Plan Tax Credits and Minimizing Tax Exposure

Both business owners and individuals have many potential opportunities to cut down on their tax burdens. A variety of credits exist, and effective investment strategies for retirement accounts can help to further reduce tax exposure.

Professional guidance and support can help you find the right approach for maximizing your tax credits and lowering exposure, both for retirement plans and in the bigger picture.
Schedule a free consultation with Dechtman Wealth Management today.

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Sam Dechtman

As a wealth advisor at Dechtman Wealth Management, Sam is committed to always doing what is best for the client. Sam began his career working at large international asset manager in Chicago assisting clients with investment analysis, portfolio construction, and retirement income strategies. During that time, Sam would receive the CERTIFIED FINANCIAL PLANNER™ designation, signaling mastery in all areas of financial planning.