Do you have a conversation with your tax preparer at tax time about contributing to your retirement to save some taxes?
While this can be done...in part... when you file your tax return, only a few options are available to you.
Being proactive and implementing a strategy will always have you coming out ahead in both wealth building and tax savings.
What is your retirement strategy in your S Corporation? Are you utilizing all your options to both build wealth and save on taxes?
Here's some more detail on your options, limits and how to customize and take advantage of a strategy that meets your goals.
Understanding Your Retirement Options as an S Corp Owner
What retirement plans are available to you? The first question you need to ask is...
Do you have employees, or are you the only one?
This makes a big difference in your options since retirement plans can't be discriminatory. If you contribute 25% as the employer (you), you'll need to offer the same to any eligible employees.
Here are some popular retirement options for S Corporation owners:
- Solo 401(k): Ideal if you’re a one-person business (or only employ a spouse). You can contribute both as the employer and employee, maximizing your limits.
- SEP IRA: A simple, flexible option that allows significant contributions but typically offers less than a Solo 401(k).
- SIMPLE IRA: A great fit if you have a small team, allowing both employer and employee contributions.
- Defined Benefit Plan: This traditional pension-like plan is perfect for high earners looking to maximize contributions—though it requires higher set-asides.
Consider a Roth Option
"But I make too much!"...Hold the front door! Your S Corporation can also offer you a loophole / tax strategy to contribute to a ROTH.
I recently received an email from Schwab that they were automatically adding a ROTH option to my S Corporation Solo 401(k) unless I opted out! ROTH for the win!
"Why ROTH?"
As we expect our investments to grow over time, ROTHs allow you to contribute post-tax dollars today (sorry - no tax savings today) but when that investment grows, your future self is NOT taxed on withdrawals of your investment nor the gains from that investment!
If you adopt a ROTH option within your S Corporation 401(k) plan, income limits do not apply!
...and wait for it
Company contributions are still deductible!
We love this strategy because Roth 401(k) contributions grow tax-free—perfect for your future financial self.
The Tax Benefits of Retirement Contributions
Saving for retirement is a smart move for your future—but it can also offer immediate tax benefits. As an S Corporation, you must view the benefits and options from both the Employee chair and the Employer / Company seat.
- Employee Contributions (Pre-Tax): Reduce your taxable income by the amount you contribute.
- Employer Contributions: Your company gets a tax deduction when it contributes, matches, or profit-shares into employee retirement accounts.
One exception: If you choose the Roth option, it won’t reduce the employee's taxable income now—but your future withdrawals will be tax-free. Note that employer contributions are deductible to the company EVEN IF you as the employee choose the ROTH option.
Employee Deferrals and Employer Matches: How It Works
As both an employee and employer of your S Corporation, you can maximize contributions from both sides.
You can choose one of the following or both as long as the combined annual contribution does not exceed the contribution maximum for that year. Note the timing difference on each!
- Employee Contributions: These need to be withheld through payroll and must occur within the tax year. Once December 31st passes by, your window has passed for that tax year. These are reflected on your W2 and your payroll filings as pre-tax withholdings from your paychecks.
- Employer Contributions: The company can match employee contributions and/or profit share to retirement plans...These do not have to be made within the calendar year, but do need to be made before you file the S Corporation tax return. If this is your plan, just make sure your retirement plan is established before year-end.
Pro Tip: Employee contributions through payroll can be tricky to set up correctly, so consider working with a payroll or tax professional to avoid costly mistakes. Do not do this on your own!
Contribution Limits for 2024
Here’s a breakdown of how much you can contribute:
- Employee Contributions (Salary Deferrals): The 2024 limit is $23,000, or $30,500 if you’re over 50.
- Employer Contributions: Up to 25% of wages, which is tax-deductible for the business but non-taxable to you as the employee.
- Total Combined Contributions: The total (employee + employer) can’t exceed $69,000 for 2024, or $76,500 if you’re over 50.
Year-End Retirement Planning Tips
As the year wraps up, it's the perfect time to review your cash flow and maximize your retirement contributions. Below are 3 strategies that we work with our S Corporation owners to evaluate and implement in the November/December time frame of each tax year.
Here are a few options to consider...
- Run an off-cycle payroll: "Catch-up" and max out your employee deferral contributions with a year-end one-off payroll run.
- Add your spouse to payroll: You can pay them up to the max contribution and have them contribute 100% to your 401(k).
- Max out employer contributions: Consider matching 25% of wages as a company profit share.
Reminder: Employee deferrals must be reported on a W-2 and included in payroll by year-end, so don’t delay!
Beware of Multi-Plan Issues
If you have multiple retirement accounts with both your S Corporation and another employer, make sure your combined contributions don’t exceed the annual limits.
If you want to open a new S Corporation retirement plan, you must close or "restate" old plans so that you don't have multiple plans running concurrently.
Choosing the Right Custodian for Your Retirement Plan
Where you open your retirement plan matters. Here are some popular options:
- For Traditional Investments: Consider brokers like Schwab, Vanguard, or Edward Jones if you plan to invest in stocks, bonds, and ETFs.
- For Alternative Investments: If you want to invest in real estate or other non-traditional assets, a Self-Directed Solo 401(k) could be a great option. Firms like Self-Directed IRA specialize in this.
California Businesses: Don’t Forget CalSavers!
If you have more than five employees, California law requires you to register with CalSavers, even if you already offer a retirement plan. While not the most robust option, you must have something in place and CalSavers is an option.
Already have a plan? You’ll need to register with CalSavers to receive a waiver to stay compliant.
By the end of 2025, this requirement will apply to any business with at least one employee in California. S Corporation owners in California will need to take action and register by the end of 2025.
Read more about CalSavers requirements in "CalSavers:Everything You Need to Know About California's Mandatory Retirement Plan"
Summary
By understanding your options and staying compliant, you can maximize both your retirement savings and tax benefits through your S Corporation. And when in doubt, always consult with a professional to make sure you're setting everything up correctly.
Need help? Book a Strategy Call with us.
