Planning for Retirement Can Also Help Your Tax Planning Each Year

Taxes seem like a bad word. We all dread tax season and hope the IRS is kind to us every year. There are many ways to help reduce your tax bill. Read on to learn the top 5 tax reasons you should start a 401(k).

1. Pay Less in Taxes While You Save

When you start a 401(k), you get the opportunity to save money through tax-deferred payroll deductions before you see it, touch it, or spend it. Therefore, you will pay less in taxes overall because it changes your annual taxable income in your favor.

In 2023, you have the right to contribute between $22,500 and $30,000 of tax-deferred income to your 401(k), as long as other criteria are met. Therefore, that is 22,500 to 30,000 of income that you do not pay federal taxes on for the entire year. Meanwhile, that money will collect interest in your 401(k) plan to allow you to save more than your contribution for when you retire.

2. Change Your Tax Bracket

Did you know a small business owner can have a solo 401(k) as long as they do not have any employees other than their spouse. In 2023, these business owners (and their spouse if they work) have the right to contribute up to $22,500 per year and up to $30,000 a year if they are over 50. A working owner in the company can also save more for retirement. These solo- employer plans also get to contribute a profit-shared tax-deferred payment to themselves as the employer for a total of $66,000.

These contributions are tax-deferred and lower your taxable income as a business owner. If you take advantage of all these contribution benefits, you may effectively lower your tax bracket and lower your federal tax percentage to a lower tax bracket. For many small business owners, this benefit is enough to justify saving for retirement in a solo 401(k).

3. Tax Credits Can Offset Plan Costs

Businesses also receive a tax credit for starting a 401(k) plan for their employees. New companies with under 100 employees can receive a minimum of a $500 tax credit and a maximum $5,000 tax credit for the first three years of the plan. Employers can apply the credit to 50% of the qualified 401(k) costs. Employers can also opt to offer an automatic enrollment feature which affords them an additional $500 per year for the first three years. Therefore, over the first three years, employers can earn up to $16,500 in tax credits to offset the costs of the plan.

4. Employer Contributions Are Tax-Deductible

Employee 401(k) plans often include an employer match. This employer match is tax-deductible to the employer. These employer contributions are optional for the employer, however, there are several reasons employers can and should take advantage of this option.

First, employer-owners can also sign up for the 401(k) plan, making them an employee as well. As a result, they will also receive the employer match.

Second, When the employer ads money to the plan, it can automatically satisfy the IRS discrimination testing rules, which allows for higher contributions by the key employees.

Finally, the match is tax-deductible, helping decrease the tax burden by offering a 401(k) and making a contribution to employee plans as an employer match option.

5. You Can Retire Tax-Free (with a Roth 401(k))

Maybe you do not need to worry about tax protection this year. However, you may wish to retire soon or even mitigate tax issues in the future. One way to do this is investing in a Roth 401(k). A Roth 401(k) does not have any income limits. Any person within your company 401(k) plan can contribute post-taxed income into a Roth 401(k). Therefore, since it is already taxed money in the Roth 401(k) any money and its dividends can get withdrawn tax-free. As a result, you can offset tax concerns by withdrawing from your plan in the future. You can also retire tax-free if that is your immediate goal.

Conclusion

If your goal is to attract, retain, and reward employees, then offering a 401(k) retirement option to employees is a must. As an employer, you can benefit from both the employer tax benefits and the employee tax benefits. Speak with a retirement planning advisor to understand the tax benefits and get started saving today.