As a small business owner, saving taxes is always at the forefront of your mind. One of the most powerful tools available to S corporation owners is the Simplified Employee Pension Individual Retirement Arrangement (SEP IRA). SEP IRAs are a popular choice among S corporation owners due to their tax-deferred growth and high contribution limits. In this article, we’ll explore how SEP IRAs can help S corporation owners save taxes.
What is an S Corporation?
An S corporation is a type of business entity that offers the liability protection of a corporation with the tax benefits of a partnership. S corporations are “pass-through” entities, meaning that the business income passes through to the owners’ personal tax returns. This allows S corporation owners to avoid double taxation, which is a common issue for C corporations.
Why SEP IRAs are a great fit for S corporation owners
SEP IRAs offer several benefits for S corporation owners. Here are a few reasons why you should consider a SEP IRA:
- Tax-deferred growth: Like other types of IRAs, SEP IRAs offer tax-deferred growth. This means that your investments can grow without being taxed until you withdraw the funds in retirement. This can help you save money on taxes in the long run.
- High contribution limits: SEP IRAs have some of the highest contribution limits of any retirement account. In 2021, S corporation owners can contribute up to 25% of their compensation, up to a maximum of $58,000. This means that you can save a significant amount of money in your SEP IRA each year.
- Easy to set up and maintain: SEP IRAs are easy to set up and maintain, making them a great option for small business owners. There are no complex reporting requirements or ongoing administrative fees, making them a hassle-free way to save for retirement.
How SEP IRAs can help S corporation owners save on taxes
SEP IRAs can help S corporation owners save on taxes in several ways:
- Deductible contributions: When you make contributions to your SEP IRA, they are tax-deductible. This means that you can lower your taxable income and reduce your tax bill. For example, if you contribute the maximum amount of $58,000 to your SEP IRA in 2021 and your taxable income is $200,000, your taxable income would be reduced to $142,000. At a 25% tax rate this would yield savings of $14,500!
- Deferred taxes on earnings: The earnings in your SEP IRA grow tax-deferred until you withdraw them in retirement. This means that you can avoid paying taxes on your investment earnings until you are in a lower tax bracket.
Conclusion
SEP IRAs are a powerful tool for S corporation owners who want to save on taxes and plan for their retirement. With high contribution limits, tax-deferred growth, and easy setup, SEP IRAs offer a hassle-free way to save for the future. If you’re an S corporation owner looking to reduce your tax bill and save for retirement, a SEP IRA may be the perfect solution for you.
