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What Can Business Owners Do Before the Deadline to Save More for Retirement?

What Can Business Owners Do Before the Deadline to Save More for Retirement?
April 10
00:03 2018

Tax deadlines occur at all times of the year, but April 15th tends to get the greatest notice. With the realization of a looming tax deadline, business owners often scramble – or get their accountants to scramble for them – to conjure up some last minute financial wizardry to reduce the tax burden. This magic usually involves some form of retirement savings plan. As we shall soon see, for many, the train has already left the station. There are still other trains to board, but they come attached with limitations. In the end, family owned businesses especially have one card up their sleeve that, while it can’t be used to help alleviate last year’s tax load, it can be played to not only reduce the current year’s taxes but increase overall family wealth.

“Business owners have a lot more options when they’re behind on retirement because they have more moves they can make,” says Charlie Jewett, Financial Advisor for Jewett Wealth Management & Renovating Retirement in San Diego, California. “Move number one is probably to get a really good tax plan and find out if you’re wasting money every year on unnecessary taxes. Tax plans usually find between $10,000 – $30,000 is being wasted every year, so re-directing that to your retirement could make a significant difference. Also, you may want to consider increasing your revenue by either doing more marketing or adding a product line or selling more products and services to your existing clients, getting more referrals with things like focus groups, etc. You may also want to consider selling your business to your employees as an exit strategy and wait to accumulate a lot of cash right now by using an ESOP.”

Like most individuals, many business owners may be most familiar with how to use IRAs to save for retirement. Indeed, last minute tax reduction strategies often involved good old-fashioned IRAs, whether they be the tax-deferred type or the after-tax (i.e., Roth) type. “Business owners have more retirement options available to them than IRAs and Roth IRAs,” says Steven E. Trytten, an attorney at Anglin Flewelling Rasmussen Campbell & Trytten LLP (AFRCT) in Pasadena, California. “There are many factors to consider in determining which type of plan is the best choice for a given business.”

First, the Bad News…
Some of the best options, though, might no longer be available. Business owners may be able to pick from a wide variety of retirement savings choices, but some of those picks have a very narrow window from which they may be picked. “Most business retirement plans must be established by the end of the year for the year of the deduction and may require contributions on behalf of some or all of the employees,” says Frank Sweeney, a partner with the New Jersey-based accounting and advisory firm Klatzkin & Company LLP.

On the bright side, if you missed the deadline, all is not lost. John Bowens, National Education Specialist at Equity Trust Company in Westlake, Ohio, says, “The deadline to establish and contribute to a retirement plan for business owners (SIMPLE IRA, Solo 401(k) or other employer-sponsored plans) was December 31, 2017 – but that doesn’t mean business owners are devoid of an opportunity to save more for retirement.”

Here are Your Choices If You Have a Retirement Savings Plan Already Established Prior to 12/31/2017:
Good news! If you’ve already established your plan by the relevant deadline within the tax year, you can still make contributions even though that tax year is long gone. Trytten says, “If the account is in place by year end, the business owner will have until at least April 15th or beyond to make the specified contribution, depending on the type of account.”

This includes some very popular and very attractive retirement savings options. “Solo 401k’s and Simple IRA contributions could be made until the filing deadline,” says Phillip Mitchell, President and Senior Portfolio Manager at Kroon & Mitchell in Grand Rapids, Michigan. “However, these accounts needed to be set-up by the end of 2017.”

The news gets even better. In some cases, you may be able to contribute beyond the normal tax deadline. “If the plan was established within the required time frame and a contribution has not yet been finalized,” says Sweeney, “one could file for an extension to provide additional time to explore options. In addition, the funding is usually extended to the extended due date or filing of the return, whichever comes first.”

Alas, if you’ve not yet established your plan, your options are limited. Still, you do have options.

Here are Your Options If You Have No Retirement Savings Plan in Place:

Option #1: A Good Old-Fashioned IRA (either pre-tax or Roth)
All those other options may be great, but if you’ve missed the boat, there’s no problem returning to old reliable. “If the account is not in place by year end,” says Trytten, “the options are more limited. As I mentioned above, IRAs and Roth IRAs can be set up any time before April 15th, but the maximum contribution is much less than might be allowed under some other types of plans.”

Actually, this year, due to a fluke in the calendar, we actually have a couple more days, or more, depending on your strategy. “A business owner with net income can also set up a pre-tax or Roth IRA and contribute by April 17, 2018,” says Anna Griffith, Director of Retirement Services at PBMares, LLP in Newport News, Virginia.

Where it can get complicated is when there are multiple sources of earned income. “Assuming they have earned income, it may still be possible to contribute to an IRA just as any individual would,” says Bowens. “The contribution limits for IRAs are separate from those pertaining to small business or employer-sponsored plans. So, regardless of the status of their retirement plan as a business owner, business owners may still contribute up to $5,500 to an IRA for the 2017 tax year as an individual prior to the April 17 deadline.”

Of course, as we’ll discover at the end of this article, there is one kind of IRA that promises much more, but only in special circumstances.

Option #2: An SEP-IRA
While still an IRA, the SEP-IRA is like a traditional IRA on steroids. And it may represent the best available option for those seeking last minute tax savings. “If a business owner has not established a qualified retirement plan for 2017 by 12/31/17,” says Clifford L. Caplan of Neponset Valley Financial Partners in Norwood, Massachusetts, “their options are pretty much limited to a SEP-IRA where 25% of the earned income (Schedule C or W-2) can be contributed up to the tax filing date up to a maximum of $54,000 for the prior year even if that date is the second extension (October 15).”

The exact formula for the contribution can get complicated depending on the nature of the business. “In addition to Traditional or Roth IRA contributions for 2017, business owners or self-employed individuals may also be able to contribute to a SEP IRA for 2017 up until April 17, 2018. Contributions are limited to 25% of compensation or $54,000 for 2017, whichever is less,” says Jordan Lochner Mills, a Senior Financial Advisor with Wipfli Hewins Investment Advisors in Minneapolis, Minnesota. “Note, for self-employed individuals, the 25% refers to NET earnings from the business after taking out half of self-employment tax and accounting for the fact that the contribution to the SEP IRA reduces the taxable earnings from the business. So, it’s advisable to have a CPA or tax preparer calculate the amount you’re eligible to contribute.”

There is, however, one major drawback to an SEP-IRA: business owners can’t just contribute to their own accounts. “A self-employed or small business can establish a SEP IRA for its employees by April 15th or even later if the employer’s tax return is extended,” says Trytten. “The business can contribute 25% of compensation up to $54,000 but may need to contribute for most or all employees.”

Which leaves us with one other option…

Option #3: Skip It by Biting the Bullet on 2018 Earnings and Focusing Instead on 2018 Earnings
Last year’s tax reform bill changed the retirement savings calculus. “A business owner who is just beginning to think about retirement plan deductions shouldn’t rush into a SEP IRA without evaluating which type of plan is really the best fit in the long run,” says Trytten. “And if that means waiting a year for the deductions to come on line, it may be well worth the wait. This is particularly important as the tax law changes from the 2017 Tax Cuts and Jobs Act come on line in 2018. One of these changes allows a deduction up to 20% against business income for businesses other than C corporations. But for many businesses, this deduction phases out if income is too high. A retirement plan is one of several tools that may help certain businesses manage the amount of income so as to qualify for a higher deduction under the new law.”

Even without the new tax bill, it might be better to bite the bullet and open a more appropriate savings vehicle beginning in the current year and forgo he tax deduction in the previous year. “Business owners can contribute to a SEP-IRA up to 25% of their net income and receive a tax deduction for this contribution,” says Crystal Stranger, Co-Founder of Viact Systems Inc. in El Paso, Texas. “However, if there is significant income it is usually most beneficial to set up a 401k and start making contributions for the next year as far greater amounts of contributions can be made in a 401k plan.”

These other options may be too attractive to pass up, even if they passed you by for this year. “Going forward and depending on many factors, a business owner may wish to explore options in such vehicles as a Solo 401(k) if he/she is a 1-2 employee firm with substantial income, a cash balance plan, etc.” says Caplan, “but it is too late for contributions to be made to these plan for 2017 if they have not already been established.”

Whatever your decision, the most important thing is to decide to save for retirement.

Bonus For Those Reading this far:
The just released book From Cradle to Retirement: The Child IRA – How to start a newborn on the road to a comfortable retirement while still in a cozy cradle explains how family owned businesses can reduce current taxes in exchange for growing future family wealth, all by establishing a Child IRA.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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