Retirement Account Options for S Corp Business Owners
All businesses should plan for their retirement, no matter the stage of their journey. As an S corporation, you’re in an uncommon situation where you draw a salary from your own company. Being both an employer and an employee unlocks retirement account options that you can benefit from greatly. Not only does this plan help you make the most out of retirement accounts, but other employees will benefit, too.
Here’s a brief overview of the different avenues available for you to take when it comes to your retirement planning, and help you find the best retirement account for S corp entities.
Traditional IRA
The Traditional Individual Retirement Account is one that many employees opt for. You can contribute up to a maximum of $6,000 annually, depending on the total income earned during the year.
One of the benefits of going for this IRA is that you get tax savings during contributions. These accounts only tax the money in them during withdrawal, allowing it to compound at higher values. The required fees for setting this up are also minimal.
People choose the traditional IRA when they expect to be in a lower tax bracket during retirement. That way, their money receives less tax compared to their current contributions.
However, there are some considerations to make before going for the traditional IRA route. For one, withdrawing the money earlier than age 59 ½ will yield a 10% penalty. You’re also required to begin withdrawals from the age of 72 onwards.
Roth IRA
The Roth IRA is distinct from the traditional one in terms of taxation. Instead of deferring taxes to pay during withdrawals, you pay them upfront, putting the rest of the money in the account. That way, the money grows in the account tax-free, and you can expect to withdraw the same value during retirement. This option is for those who foresee themselves being in a higher tax bracket after retirement.
However, there are limitations to contributing to these accounts. Based on your earned income, you may have limited or zero contributions. The highest earners (above $129,000 for a single contributor) won’t be able to choose a Roth IRA.
When qualified, you can take penalty-free withdrawals from your contributions without requirements. There will still be a penalty if you decide to withdraw early from the earnings.
SEP IRA
The Simplified Employee Pension IRA provides a way for S corporations to reduce business taxes with a retirement fund. It is a type of account that an employer can set up where they contribute up to 25% of an employee’s salary to the fund. You can essentially use part of your salary as an employee and place it in a retirement account. Contributions will be marked as tax deductions which will alleviate the tax load on your company.
The advantage of the SEP IRA is that it’s flexible with the amount you contribute. However, it must be the same percentage for all employees.
You can also set up the SEP IRA as an employer, then create a Roth IRA for employees. This is a way to maximize tax savings while also setting up retirement baskets. Like the traditional IRA, a SEP IRA will require minimum withdrawals from the age of 72 onwards.
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE IRA) is an option for small businesses with less than 100 employees. As an employee, you can contribute up to a set amount as pre-tax contributions. From there, the employer has the option to contribute up to 3% of the employee’s wages into the account. These contributions are tax-deductible, which can benefit you as a business owner.
Similar to other IRAs, there is a standard 10% withdrawal penalty if you start taking money before the age of 59 ½. There is also a severe 25% penalty when you decide to take the money within the first two years of opening the account. Other than that, the fees are relatively low. Employees also have 100% ownership over their money.
SOLO 401(k)
The SOLO 401(k) is also known as the individual 401 (k). This plan works like a regular 401(k) account, but you can contribute as an employee and employer. An employee has a contribution limit set by the IRS, while the corporation has one, as well. You can take advantage of this by maximizing the contributions on both ends. There are also catch-up contribution allotments for employees above the age of 50.
You can also place contributions into a post-tax Roth setup if you desire. However, IRS set limitations still apply, and you must also consider your current tax situation.
Similar to the other retirement accounts, you’re required to withdraw minimum amounts by the age of 72. Contributions also have a similar deadline to tax filing.
Speak to a Core Tax Specialist Today
Since there are many options available for retirement accounts, choosing one can be an overwhelming process. Having professional insight will allow you to see different perspectives of each plan. From there, you can get a recommendation of the options available and what they mean for your business. You can begin setting up plans for retirement while also maximizing your tax savings as an S corporation.
Core tax specialists have helped many S corporations refine their accounts and make the most out of their contributions. Contact us today and consult with one of our team members. Our goal is to make sure you’re making the most out of retirement planning.