If you’re a business owner looking to save for retirement while also reducing your taxable income, adding a profit-sharing component to an employer retirement plan could be an attractive option. Not only does it allow you to set aside a portion of your profits for your retirement, but a profit-sharing plan also provides tax advantages to help increase overall savings. Below, we’ll explore some of the key tax advantages of a profit-sharing retirement plan and how they can benefit business owners.
First, let’s define a profit-sharing plan: Essentially, it’s a retirement plan that allows a company to contribute a portion of its profits to the retirement accounts of its employees. The contributions are typically based on a percentage of each employee’s salary, and the amount of the contribution can vary from year to year depending on the employer’s flexibility.
Below are some tax advantages of a profit-sharing retirement plan for business owners.
1. Tax-deductible contributions: One of the primary benefits of a profit-sharing retirement plan is that contributions made by the business are tax-deductible. This means that the amount the company contributes to the plan can be deducted from its taxable income, reducing its overall tax bill. For business owners who are looking to lower their taxable income, this can be a significant advantage.
2. Flexibility in contributions: Profit-sharing retirement plans offer flexibility in terms of how much the company contributes each year. Since the contributions are based on a percentage of the company’s profits, the amount contributed can vary from year to year. This can be beneficial for businesses that experience fluctuations in profits or want to adjust their retirement contributions based on their financial situation.
3. Tax savings up until filing: One of the lesser-known advantages of a profit-sharing retirement plan is that business owners can generate a deduction for their contributions up until they file their tax return. For example, if a business owner makes a profit-sharing contribution in 2022, they have until the tax filing deadline in 2023 (typically April 15th) to claim the deduction for that contribution on their 2022 tax return. This can provide some flexibility for business owners who want to maximize their retirement savings while also reducing their current year’s tax liability.
A profit-sharing retirement plan can be a powerful tool for business owners who want to save for retirement while also reducing their taxable income. With tax-deductible contributions, tax-deferred growth, higher contribution limits, flexibility in contributions, and the ability to generate a deduction up until filing, there are many tax advantages to consider. If you’re a business owner and would like to learn more about the benefits of a profit-sharing plan, contact the team at Innovative Investment Fiduciaries, LLC by calling (856)-242-3328 or emailing resources@iifria.com.
