By Edward “Ed” V. O’Neal, Vice President and Manager, Retirement PlansPrint This Post
Tax season is a time when business owners often are juggling multiple priorities, seeking approaches for potentially reducing tax liability, while also looking for opportunities to increase retirement savings. For business owners looking for 2019 tax deductions, along with a way to jump start retirement savings, the SEP IRA is the only employer-sponsored retirement plan that can be both established and funded after the 2019 calendar year. SEP IRAs have until the due date of the business tax return (including extensions) to be established and to accept contributions. SEP IRAs are designed to be simple and cost effective, and don’t permit complex plan features such as vesting schedules or plan loans. Although simplistic in their operation, SEP IRAs may not be appropriate for every business owner situation and their unique design and features should be carefully considered before establishing this type of retirement plan.
However, beginning with the 2020 tax year, the recently enacted Setting Every Community Up for Retirement Enhancement (SECURE) Act broadens the retirement plan options that can be established and funded after the end of a tax year. Under the new SECURE Act, business owners will no longer be limited to SEP IRAs, but can choose from a variety of plan types (i.e. 401(k), Profit Sharing, Money Purchase, etc.) that can be created by the due date of the business tax return (including extensions). This expansion of plan options should give business owners greater flexibility and control in selecting the plan design that best meets their tax and retirement savings objectives.
Additionally, businesses with existing retirement plans will need to be mindful of both contribution (employer and employee deferral) and tax filing deadlines for their plans. Employer contribution deadlines extend until the due date of the business tax return (including extensions), while employee deferrals should be withheld and deposited as soon as possible by business owners (generally within 15 days for 401ks and 30 days for SIMPLE IRA plans).
Whether considering a new retirement plan or reviewing contribution deadlines, remember to consult with your tax or legal advisor to review the impact to your personal and business tax situation. Consider speaking with your Benjamin F. Edwards financial advisor to review your retirement plan alternatives.