When you establish a retirement plan for your business, you’re not just offering a valuable employee benefit—you’re creating substantial tax deductions. Here’s what many business owners don’t realize: employer contributions to retirement plans are fully deductible as a business expense, and there are additional tax credits available for starting new plans.
New Plan Tax Credits: The IRS offers generous credits for small businesses that establish new retirement plans:
If you’re finding that your current retirement savings strategy isn’t working—or if you don’t have one yet—a safe harbor 401(k) might be your solution. These plans are particularly powerful for businesses with:
Highly-Compensated Employees: If you or your key employees earn over $160,000, traditional 401(k) plans can become problematic due to discrimination testing. Safe harbor plans eliminate this headache entirely, allowing high earners to maximize their contributions without worry.
Cash Flow Predictability: Since safe harbor plans require employer contributions, they work best when you have steady, predictable income. The good news? These contributions are tax-deductible, often resulting in significant tax savings that help offset the cost.
Limited Administrative Appetite: Traditional 401(k) plans require annual discrimination testing and complex administration. Safe harbor plans eliminate most of this burden, making them ideal if you want the benefits without the administrative headaches.
Right now presents unique opportunities for retirement plan optimization:
Mid-Year SIMPLE IRA Replacement: If you currently have a SIMPLE IRA that isn’t meeting your needs, you have until August 15 to replace it with a 401(k) plan for the current year. This switch can provide immediate tax advantages and higher contribution limits.
September 15 Deadline: For new safe harbor plans, September 15 is a critical deadline. Plans established by this date can be effective for the entire tax year, maximizing your current-year deductions.
While tax savings are compelling, don’t overlook the broader business benefits:
Talent Attraction and Retention: In today’s competitive job market, a robust retirement plan can be the differentiator that attracts top talent and keeps your best employees.
Owner Benefits: Safe harbor plans often allow business owners to contribute more to their own retirement than they could with other plan types, creating personal wealth-building opportunities alongside business tax deductions.
Employee Engagement: When employees feel secure about their financial future, they’re more focused, productive, and loyal.
The intersection of retirement planning and tax strategy requires careful analysis of your specific situation. Consider these questions:
Most business owners shy away from retirement plans as a tax planning strategy because it feels like just another squeeze on their cash flow. What many don’t realize is that plans can be built with loan provisions allowing owners and their employers to borrow from their own savings and repay themselves interest instead of banks, credit cards, and the IRS. This strategy makes a retirement plan far more compelling than just borrowing money to buy new equipment at the end of every year.
Retirement plan strategy isn’t just about the future—it’s about optimizing your tax situation today while building long-term value for your business and employees. The combination of immediate tax deductions, startup credits, and improved employee benefits makes this one of the most effective strategies available to small business owners.
As we approach key deadlines this year, now is the perfect time to evaluate whether your current approach is serving your tax planning and business goals. Let’s schedule a consultation to review your specific situation and determine if a safe harbor 401(k) or other retirement plan strategy could enhance your overall tax planning approach.
Remember: the best tax strategy is one that serves both your immediate needs and long-term goals. Retirement planning does exactly that.
Ready to explore how retirement planning can reduce your tax burden? Contact our office to schedule a consultation and discover the strategies that make sense for your business.
Christine Gervais
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
