Let’s quickly dive into today’s topic. I’ll share information about spring retirement contributions. You might wonder if there’s still time to save, given it’s already December. The answer is yes, and I’ll explain how.
When we talk about tax savings, we’re referring to taxes you would otherwise pay. Savings generally come from your 401(k) plan or other retirement savings. The government allows you to put money away for your future retirement benefits without paying taxes on that amount. We’ll tell you how much you can save and the tax dollars involved.
Today’s webinar focuses on retirement savings, which is just one of the tax-saving tools we offer. If you work with Community CPA for your 2024 tax planning, this is one of the tools we use.
A 401(k) plan is one option. There are also SEP plans, SIMPLE IRAs, and cash balance plans. These names might not make sense if you haven’t worked with them, but it’s good to be familiar with them.
2025 RETIREMENT CONTRIBUTIONS
401(k) and 403(b) – For 2025, the contribution limit for employees under 50 participating in a 401(k) plan is important. If you don’t contribute by the end of the year, you lose the opportunity. Missing out on a $23,000 contribution means losing $4,600 in tax savings if your tax rate is 20%. This money goes into your 401(k) account, and you get a tax refund. The contribution amount also applies to 403(b) plans, common in nonprofit organizations. For 2025, the limit increased by $500. People over 50 get an additional $7,500 catch-up contribution, and those over 60 get a super catch-up of $11,250. If you work for a company offering a 401(k) and are over 60, you should request the super catch-up contribution. This is relevant for small business owners too. In 2024, you can put away up to $69,000, reducing your taxable income. This isn’t an expense but a direct contribution to your 401(k) under your name, sponsored by your business. For small businesses, this can mean significant tax savings. For example, at a 26% tax rate, you save $17,940 in federal taxes, plus state savings. This totals nearly $25,000 in tax savings.
SEP IRA – A SEP plan is another option, allowing up to $69,000 in contributions for 2025. Business owners must pay themselves a minimum compensation of $750 and meet other conditions.
SIMPLE IRA – SIMPLE plans have lower limits but are easier to manage.
Analysis: In my tax planning sessions, I prefer 401(k) plans for their higher deductions. SEP plans don’t need to be processed through payroll, making them simpler. Contributions can be made in 2024 or 2025, with deadlines aligned with tax filing dates.
2024 RETIREMENT CONTRIBUTIONS
Don’t miss the IRS limits for 2024. Maximizing retirement contributions each year ensures substantial savings by retirement. Even if you pass away early, your 401(k) benefits your spouse or children. We also do estate planning, so if you have questions, we can help. The bottom line is that you don’t lose the money; it doesn’t go to the IRS. Paying income tax on your profit means that money is gone.
401(k) – We discussed 401(k) plans and catch-up contributions. You can still open a 401(k) solo plan and contribute personal deferrals via your last payroll in December. You can also do a company match of 25% of your gross salary later when you file your company taxes. If you’re over 50, you get a catch-up, and if over 60, a super catch-up. Knowing these terms helps when working with financial planners.
SIMPLE IRA – SIMPLE plans also offer catch-up contributions but with smaller amounts. If you can’t contribute the full amount to a 401(k), you can do a smaller amount. However, if you want to contribute more, a 401(k) is better than a SIMPLE plan due to higher limits. People choose SIMPLE plans for lower administrative fees, but a 401(k) offers more significant tax savings. You can shop for plan providers to know who charges what rates, but remember there’s also a $5,000 tax credit for your company to set up these benefit plans. This credit can be used for three years, so don’t get hung up on the fees. The savings from tax benefits (20% to 37%) far outweigh the fees (1% to 2%).
Cash Balance Plan – A cash balance plan is significant. You can put away $275,000 without paying taxes, which is a company expense. If you made $500,000 in profit, you could allocate $275,000 to your pension plan, reducing your taxable income. This requires actuarial calculations, but the idea is to maximize your tax deductions. For 2024, the maximum contribution is $275,000. If you didn’t know about this, you’re missing out on tax deductions. This is why you might be paying more taxes than necessary.
Traditional IRA – In 2024, the IRA contribution limit was $7,000, and it remains the same for 2025. If you’re over 50, you have a $1,000 catch-up contribution. Plan ahead to save. Knowing the limits helps you and your employees save significantly in retirement plans for 2025.
Contact our firm to understand your savings potential. Retirement accounts are one of the biggest ways to save. We offer various plans like 401(k), cash balance plans, SIMPLE IRA, and SEP plans. Don’t pay taxes when you can save by putting money away.
