There's Still Time to Start a Retirement Plan, Reduce 2021 Taxes

Evaluating the Options

SEP IRAs are retirement planning vehicles that allow only the employer to make contributions on behalf of employees. In cases where the client is operating the business, the client is usually both employer and employee. Like other traditional retirement accounts, SEP IRAs are funded on a pretax basis (i.e., they are deductible by the client and reduce taxable income). 

For 2021, clients can contribute the lesser of (1) 25% of compensation or (2) $58,000 to a SEP IRA (increasing to $61,000 for 2022). Because the client often does not know how much compensation they have earned from the business until after the end of the calendar year, the ability to make contributions after Dec. 31 can help the client avoid overfunding.

The SEP IRA option may also be attractive because there is no requirement that the client contribute to the account every year.

It's also important to remember how the presence of employees will affect the client's retirement planning options. Sponsors of solo 401(k)s are not permitted to have any employees. Thus, business owners who plan to hire employees will no longer qualify for the solo 401(k) structure — meaning that they'll be subject to the traditional nondiscrimination requirements that apply generally to 401(k) plans unless they satisfy certain safe harbor criteria.

Clients who do have employees should also know that, if they contribute to their own SEP account in any given year, they must also contribute to the accounts of all employees for that year.

Conclusion

For many clients, it's not too late to establish a retirement plan for the 2021 tax year. In fact, now could be the ideal time for clients to evaluate their 2021 income planning needs and retroactively adopt a plan to reduce taxable income.

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