Are you the only employee of your 1 man S Corporation? Well there is a unique tax straegy for you to super charge your tax deductions and save for retirement!
For small business owners operating as S Corporations and serving as the sole employee, the Solo 401(k) retirement plan presents a compelling opportunity to achieve significant tax advantages while building a secure financial future.
Tax-Deferred Contributions
One of the primary advantages of a Solo 401(k) for S Corporation owners is the ability to make tax-deferred contributions. As both the employer and employee, you can contribute up to a certain limit, which is typically higher compared to other retirement plans. For 2024, the total contribution limit is $69,000 for individuals under 50 years old and $76,500 for those 50 and older, including both employee elective deferrals and employer contributions.
Employer Contributions as Tax Deductions
As the owner of an S Corporation, your contributions to the Solo 401(k) plan as an employer are considered business expenses and are tax-deductible. This means you can reduce your taxable income by contributing to your retirement account, effectively lowering your overall tax liability.
Roth Option for Tax-Free Growth
Another appealing feature of the Solo 401(k) is the ability to make Roth contributions. While traditional contributions are made with pre-tax dollars and grow tax-deferred until withdrawal, Roth contributions are made with after-tax dollars, but qualified distributions, including earnings, are tax-free. This can be advantageous for individuals who anticipate being in a higher tax bracket during retirement or prefer tax-free growth potential.
Catch-Up Contributions for Those 50 and Older
For S Corporation owners aged 50 and older, the Solo 401(k) allows catch-up contributions, enabling you to contribute additional funds beyond the standard limits. This provision is especially beneficial for individuals looking to accelerate their retirement savings in the years leading up to retirement.
Loan Options and Flexibility
Unlike some retirement plans, the Solo 401(k) may allow you to take loans from your account, providing access to funds for various purposes while still maintaining the tax-advantaged status of your retirement savings. This flexibility can be valuable for managing cash flow or seizing investment opportunities.
The Big Takeaway
In summary, the Solo 401(k) offers S Corporation owners who are the only employees a powerful tool for maximizing tax advantages and building a robust retirement portfolio.
Calculating the correct 401k contribution that maximize your tax deduction while minimizing FICA taxes requires planning. Be sure to work with your tax advisor to see if the Solo 401k would be the right choice more you, and if so what is the optimal contribution you can make without over paying FICA taxes.
Think Big! Think Growth!
Omar Virjee, CPA CTC
