Are You an S Corporation Owner Looking to Maximize Retirement Contribution Plans? A complex issue must be taken into consideration, taking into account employee needs as well as Subchapter S of the Internal Revenue Code requirements.
Small business owners represent an array of goals, needs and abilities; therefore it is imperative that retirement planning for each small business owner takes each individual’s goals, needs and abilities into account. S corporation owners may enact strategies recommended by tax advisers in order to save FICA taxes by paying themselves through salary/profit distributions as advised; unfortunately however, this often leaves owners subject to back taxes, penalties and interest from the IRS; there are ways around this trap through qualified retirement plans.
Simplified Employee Pension Individual Retirement Account, commonly known as SEP IRA, is the go-to retirement plan for S corporations. Easily established with low cost requirements and suitable for companies of any size. One major advantage is that an owner can act both as employee and employer within this type of plan; making pretax contributions of up to $22,500 annually as an employee while deducting 3% from your wages as the latter.
Keep in mind, however, that an SEP IRA does not permit catch-up contributions and doesn’t permit loans or early withdrawals without penalties. Furthermore, an SEP IRA requires owners to match employee contributions dollar for dollar; this may prove challenging for small businesses with few employees.
Solo 401(k), an individual retirement account specifically tailored for S Corp owners, allows both pretax employee contributions and tax-deductible employer contributions to an account, with up to $19,500 annually allowed as pretax contributions (plus $3,000 more if 50 or older) until 2021; it requires maintaining an adequate wage but offers greater flexibility than SEP IRA plans.
Even with its limitations, a Solo 401(k) can still provide S corporation owners with an effective retirement solution. One major drawback of this plan is that contribution deadlines tend to fall near individual federal tax filing deadlines (September 15 for extension filings).
Note that you cannot form a controlled group with other business entities and offer only certain retirement plans to that group. The IRS has strict rules about controlled groups, specifically brother-sister controlled groups. Therefore, it is critical that you work closely with both an accountant and financial planner when selecting an ideal retirement plan that matches up with your specific circumstances; having expert guidance can help avoid common errors that can have significant repercussions.