Business owners whose only source of retirement savings is their business face significant challenges when transitioning to retirement. Can you sell the business when you’re ready to do so? Will the market value your company as much as you do? How will the taxes from the sale impact your personal bottom line?

If you are a business owner looking for ways to lower your personal and business taxes and ways to save for retirement, we have some good news for you. Less Taxes Means More Savings.

Do you know the tax benefits to starting a 401(k)?

The tax benefits from having a retirement plan can sometimes appear complex. Read below and learn 4 simple ways TRPC and your 401(k) Plan allows you to better manage your savings protecting your income from taxes and deductions.

  1. Save more to pay less in taxes

In 2020 you will be able to contribute $19,500 into a 401(K) Plan or $26,000 if you are over 50 years of age. In a SIMPLE IRA, you can contribute $13,500, or $16,500 if age 50 or over. Look at the table below and see how a 401(k) option can offer more personal tax savings and compare it to other types of retirement plans.

In the example below, we’ll assume that the business owner has $150,000 from their company through W-2, Schedule C or K-1 Income.

You could pay $14,250 less in taxes for 2020 and invest more money for your retirement. Up to $39,000 more than in a SIMPLE IRA and $51,000 more than in an IRA.

You can also view a post-tax scenario below if retiring tax free is for you. In the example below, we show a Roth scenario for a participant under 50 years of age who pays taxes at an adjusted marginal rate of 25%. The participant is choosing to invest the max amount in a 401(k) rather than take the current deductions in an IRA or a Simple IRA. In a traditional 401(k) taxes are deferred until the money is withdrawn in retirement.

There is more immediate tax available through the SEP-IRA, though there is no Roth option to have the individual deferrals grow tax free.

With a Roth 401(k) you could pay $9,375 less in taxes while still investing up to $43,500 more than in a SIMPLE IRA and $51,000 more than in an IRA.

  1. Looking for ways to save even more?
    • Combining a Solo Defined Benefit (DB) Plan with your 401(k) could take you into six-digits for your annual retirement savings, creating the potential for an additional tax savings, less the additional expenses associated with running a DB plan.

  1. Double your savings with contributions for your spouse.
    • Does your spouse work in the business as well? All the same saving opportunities and tax benefits would apply for them as well.

  1. Have employees? You might qualify for new 401(k) Plan Tax Credits
  2. When starting your first 401(k) plan, you might also qualify for a $500 tax credit for the first 3 years of your plan. How do you qualify?

    • You must have at least one employee other than the owner.
    • Owner must earn less than $125,000 a year.

The tax credit is equal to 50% of administration and 401(k) plan setup charges with a cap of $500. This will save you an extra $1,500 in tax credits.
While a plan with non-owner employees is more expensive to run than an owner only plan, there are still significant opportunities to save for your retirement, save on taxes, attract great talent and reward your employees through a 401(k) plan.