The Best Sole Proprietorships Retirement Plans to reduce your 2024 Tax Bill

Introduction

As a sole proprietor or a business owner operating a single-member corporation (C or S) with no employees, planning for retirement can be both rewarding and tax-efficient. The right retirement plan not only helps you secure your financial future but also provides significant tax benefits by reducing your taxable income.

If you haven't set up a retirement plan yet, there is still time to take action for the 2024 tax year. Below, we explore the best retirement plans available for sole proprietors and small business owners, highlighting their benefits and contribution limits for 2024 and beyond.

1. SEP-IRA (Simplified Employee Pension)

The SEP-IRA is one of the easiest retirement plans to set up and maintain. It is designed for self-employed individuals and small business owners, allowing significant employer contributions while keeping administrative costs low.

Benefits of a SEP-IRA:

• High Contribution Limits: You can contribute up to 25% of your net self-employment earnings, with a maximum contribution of $69,000 in 2024 ($70,000 in 2025).

• Easy Setup and Low Maintenance: SEP-IRAs are simple to establish with minimal paperwork and reporting requirements.

• Flexible Contributions: You can contribute different amounts each year based on business profitability.

• Tax Deductible Contributions: Contributions reduce your taxable income, providing immediate tax savings.

Considerations:

• Contributions must be made by the tax filing deadline (including extensions) for the previous tax year.

• Unlike a 401(k), employees (if you have any) must receive the same percentage contribution as the owner.

2. Solo 401(k) – The Ultimate High-Limit Option

A Solo 401(k) (also known as an individual 401(k)) is an excellent option if you have no employees except for a spouse. It allows for both employer and employee contributions, resulting in higher contribution limits compared to other plans.

Benefits of a Solo 401(k):

• Maximum Contribution Potential: The total limit for 2024 is $69,000 (or $76,500 if you're 50 or older). In 2025, the limit increases to $70,000 ($81,250 with catch-up contributions).

• Dual Contributions: As both employer and employee, you can contribute:

  • Employee Deferrals: Up to $23,000 in 2024 ($24,500 in 2025), or 100% of earned income, whichever is lower.

  • Employer Contributions: Up to 25% of compensation, bringing the total potential contribution up to the annual cap.

• Roth Option Available: You can choose between a traditional pre-tax Solo 401(k) or a Roth Solo 401(k) for tax-free growth.

• Loan Provisions: Unlike an IRA, you can borrow against your Solo 401(k) if needed (up to $50,000 or 50% of the balance).

Considerations:

• You must establish the plan by December 31, 2024 to make contributions for the tax year.

• Some administrative requirements apply, including filing Form 5500-EZ if your plan assets exceed $250,000.

3. SIMPLE IRA – Ideal for Modest Salaries

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is an excellent option for sole proprietors who want a straightforward retirement plan with lower contribution limits than a Solo 401(k).

Benefits of a SIMPLE IRA:

• Lower Contribution Limits: You can contribute up to $16,000 in 2024 ($19,500 if age 50 or older).

• Employer Matching: The business can match up to 3% of your net self-employment earnings or contribute a flat 2% of salary, regardless of employee contributions.

• Easier Administration: Less paperwork compared to a Solo 401(k) or SEP-IRA.

Considerations:

• Contribution limits are lower than other retirement plans.

• Unlike a SEP-IRA, employer contributions are mandatory.

4. Profit-Sharing Plan – Flexible Employer Contributions

A Profit-Sharing Plan allows sole proprietors to make employer-only contributions based on a percentage of income, making it a great option if you want the flexibility to contribute in profitable years and skip in lean years.

Benefits of a Profit-Sharing Plan:

• Contribution Limits: You can contribute up to 25% of net earnings, with a maximum cap of $69,000 in 2024.

• Flexibility: Contributions are discretionary, meaning you can decide each year how much to contribute.

• Tax Benefits: Contributions reduce taxable income, lowering your overall tax burden.

• Loan Options: Some plans allow loans similar to a Solo 401(k).

Considerations:

• Higher administrative costs compared to a SEP-IRA.

• Requires a plan document and potentially annual filings.

Choosing the Best Retirement Plan for Your Needs

Each of these plans offers unique advantages, but the best choice depends on factors like:

• Your income level – Higher earners may prefer a Solo 401(k) or SEP-IRA for their higher contribution limits.

• Desired flexibility – A Profit-Sharing Plan allows flexible contributions, while a SIMPLE IRA has mandatory contributions.

• Administrative complexity – SEP-IRAs and SIMPLE IRAs are easier to manage than Solo 401(k)s or Profit-Sharing Plans.

• Need for loans – Only Solo 401(k)s and some Profit-Sharing Plans allow loans.

If you haven't yet set up a retirement plan for 2024, now is the time to act. Some plans must be established before year-end, while others allow contributions up to your tax filing deadline.

Get Expert Help with Your Retirement Planning

Selecting the right retirement plan can be complex, but making an informed decision now can lead to substantial tax savings and a secure financial future.

If you need assistance choosing, setting up, or managing your retirement plan, feel free to reach out. Call me directly at xxx-xxx-xxxx, and let’s discuss the best strategy for your business and long-term goals.

Secure Your Retirement & Reduce Your Taxes—Take Action Today!