8 Reasons Why Your Small Business Needs a Retirement Plan

January 10, 2019

If you run a small business, chances are you may be considering a retirement plan. Whether it’s just you working alone or you have employees, you stand to realize a number of clear benefits from instituting a retirement plan for your business. Here are eight reasons why your small business needs a retirement plan:

  1. Immediate Tax Deductions

One of the biggest benefits you get when it comes to retirement plans is that you can take a tax deduction for contributions to your employees’ retirement accounts. Qualifying contributions you make to the plan are immediately tax deductible. This is true even if you’re a sole proprietor with no employees.

  1. Tax Credits for New Plans

If you are a new small business with at least one employee, and you start the first retirement plan for your company, you can get a tax credit of as much as $500 from the IRS each year during the first three years of your business just for setting up the plan. That’s as much as $1,500 in free money you wouldn’t have had otherwise.

  1. Accumulated Earnings

Putting your money in a retirement account isn’t the same as stuffing it in a shoebox and hiding it under your bed. The money gets invested, and earnings accumulate within the plan on a tax-deferred basis until the proceeds are distributed.

  1. Creditor Protection

With some exceptions, retirement plan assets are protected from creditors your business may face, including creditors of individual plan participants. That security can go a long way toward providing peace of mind for retirement.

  1. Taxable Income Deferred…

When plan participants invest in a retirement account, they don’t recognize taxable income until funds are distributed from the plan. The net effect of retirement investing is that it lowers your employees’ individual tax bills now, encouraging them to save for the future.

  1. And Deferred Even More

Taxes on income can be further delayed by rolling over the proceeds of a plan distribution to an individual retirement account (IRA). So when employees leave your business, they can take their money with them – along with any vested contributions your business has made on their behalf – and continue to protect its tax-deferred status in another retirement account.

  1. Attract and Retain Quality Employees

Employees choosing where to work can be heavily influenced by the benefits you offer. A retirement plan, especially if it includes employer contributions, can promote your recruitment efforts and help you to retain quality employees for years to come.

  1. New TCJA Tax Deductions

The Tax Cuts and Jobs Act of 2017 allows business owners with pass-through income (sole proprietorships, partnerships, S corporations, and LLCs) to deduct 20 percent of their net profits from their taxable income. For many businesses providing professional services, this qualified business income (QBI) deduction has a cap. Increasing retirement plan contributions can bring more income under the cap, creating additional tax deductions they would not otherwise have been eligible to receive.

To makes the most of your retirement account planning, ask a knowledgeable tax accountant for assistance.

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