If most of your money is tied up in your business, saving for retirement can be a challenge. So, if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. If you might be subject to the 3.8% net investment income tax (NIIT), this may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income (MAGI) and thus help you reduce or avoid the NIIT.
Keep in mind that, if you have employees, they generally must be allowed to participate in the plan, provided they work enough hours and meet other qualification requirements. Here are a few options:
Profit-sharing plan: This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2022 contributions as late as the due date of your 2022 income tax return, including extensions.
SEP: A Simplified Employee Pension is a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But depending on your situation, your contribution limit may be lower. A benefit is that a SEP is easier to administer than a profit-sharing plan.
Defined benefit plan: This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum compensation for benefit purposes for 2022 is generally $245,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the 2022 contribution needed to attain the future benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2022 contributions until the due date of your 2022 income tax return, including extensions. Please keep in mind that with this plan employer contributions generally are mandatory.
Please contact your friendly HM&M advisor if you have any questions.
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