Tax Benefits of Qualified Retirement Plans
Nate Moody, CPFA – RETIREMENT ADVISOR, PARTNER
MARCH 2024
Many of the reasons for offering a retirement plan are clear—helping your employees save for retirement, differentiating your company when recruiting & retaining employees—however, there are also a number of potential tax benefits available. With tax season upon us, the team at Lebel & Harriman Retirement Advisors wanted to remind you of some of the different tax benefits associated with qualified retirement plans. As always, this should not be construed as tax advice. You should work with a licensed tax professional when making tax decisions.
Of note, we are focusing on the following key areas: (1) SECURE Act 2.0 enhanced tax credits for small businesses starting a retirement plan, (2) tax deductibility of employee and employer contributions to retirement plans, (3) ‘tax saver’s credit’ for lower-income participants, and (4) the additional tax benefits possible with a Cash Balance plan.
1. SECURE Act 2.0’s Enhanced Tax Credits
SECURE Act 2.0 significantly increased the tax credits available for small businesses that decide to offer a retirement plan. In addition, it creates a new tax credit for small businesses that start a retirement plan AND provide an employer contribution to their employees. Those credits are potentially up to $5,000/year for the first three years and $1,000/employee/year for the first five years, respectively. For more information on those credits, please refer to this article (and check with your accountant): https://www.napa-net.org/news-info/daily-news/where-credit-due-tax-credits-small-employer-plans-under-secure-20.
2. Tax Deductibility of Retirement Plan Contributions
Both employer and employee contributions to retirement plans offer tax benefits. Employers can deduct contributions made to their employees’ retirement accounts from their taxable income, reducing their overall tax liability. Additionally, these contributions are not subject to payroll taxes. Similarly, employees benefit from pre-tax contributions, which lower their taxable income. Unlike Individual Retirement Accounts (IRAs), there are no income limits for making pre-tax contributions to a retirement plan. Additionally, the IRS annual contribution limits for SIMPLE IRAs and 401(k)/403(b) plans are much higher than for IRAs.
3. Retirement Savings Contributions Credit (Saver’s Credit)
Depending on an employee’s income, they may be eligible for a tax credit (as opposed to a tax deduction) when saving for retirement. Information on the Retirement Savings Credit can be found here: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit.
4. Cash Balance Plans
Cash Balance plans present an additional avenue for tax savings and retirement growth. They blend features of both defined benefit and defined contribution plans, offering high contribution limits and tax-deferred growth. Depending on your age and other assumptions, contributions to a Cash Balance plan may exceed the IRS Defined Contribution limits. Cash Balance plans are often offered in addition to 401(k) Profit Sharing plans. Please reach out to your Lebel & Harriman Retirement Plan Advisor if you have any questions on whether a Cash Balance plan makes sense for your company.
In Conclusion
At Lebel & Harriman Retirement Advisors, we are dedicated to helping you navigate the complexities of retirement plans and potential tax benefits. By understanding and utilizing the tax benefits of qualified retirement plans, your business can not only provide valuable benefits to your employees but also potentially enjoy significant tax savings.
We encourage you to contact us to explore how we can assist you in designing and implementing a retirement plan that meets your business needs and maximizes your financial benefits.
This document is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. The information provided has been derived from sources believed to be reliable, but is not guaranteed as to accuracy, and does not purport to be a complete analysis of the material discussed.
Any tax-related information connected to this article is provided as general education and should not be considered a recommendation. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor 130 Springside Drive Suite 300 Akron, OH 44333-2431 Telephone: 800-765-5201 Lebel & Harriman, LLP and Lebel & Harriman Retirement Advisors are separate entities from Valmark Securities, Inc and Valmark Advisers, Inc.
