BY: SUSAN POWERS, CFA, CPA, CFP®, CPFA®
Are you one of many small business owners who finds that business has never been better? After facing periods of uncertainty these past two years, many clients now note that they are having one of their best years ever. If you find yourself in this fortunate position, it’s not too late to save for your own retirement now *and* create a tax deduction for 2021.
Recent legislation greatly extended the deadline to create a new retirement plan for your business. If you are an LLC taxed as a partnership or S Corporation, by extending your tax return, you have until September 15, 2022, to act!
If your business finished the year with strong results, you likely have more cash in your business accounts than is needed. Consider using this extra cash to fund contributions to a new or existing retirement plan. These contributions are a tax-deductible business expense, add to your personal retirement savings, and grow tax-deferred until withdrawn years later in retirement.
One of my favorite tax deductions – one that benefits you in addition to providing a deduction! We believe you can make real progress on your personal savings goals while being rewarded for doing so with an immediate tax savings that is typically larger than your expected investment return.
How do you measure your tax savings? By knowing your marginal income tax rate. This rate is how much you owe in additional income tax on your next $1 of taxable income. Looked at another way, your marginal rate is how much you save by reducing your income tax liability for every $1 of additional tax deductions.
Marginal tax rates can quickly add up to 35% to 40% or more when also including state income tax rates. Finding new tax deductions creates an immediate return on your money equal to your marginal tax rate.
Here’s an example:
- $25,000 in tax deductible retirement plan contributions
- 35% marginal tax rate
- $8,750 in tax savings ($25,000 x 35%)
Extended deadlines for creating and funding retirement plans for 2021 are listed below based on your tax filing status:
So, which type of retirement plan is right for you? There are several options you will want to evaluate carefully. These plans can be complex. AssetGrade draws on our years of experience, working closely with tax and pension professionals, to deliver customized solutions for our clients. Call us today to understand your options for maximizing the use of your extra cash.