Assuming you don’t have some unusual, complicated tax situation, we assume that your 2021 Income Tax Return has already been filed. For most people, income taxes are now “out of sight, out of mind” until next spring. However, some small businesses and self-employed people may still have a chance to improve their situations retroactively, simultaneously improving their own personal financial futures.
Certain Small Business Retirement Plans can be opened until the extended filing date requirement, assuming an Automatic Extension was filed. This means October 17, 2022, is the date (October 15 falls on a Saturday, so the Extension Due Date moves to Monday, Oct. 17). Some small business owners may have been unpleasantly surprised at the size of their 2021 tax bills in April this year. For some of these people, some relief could be realized by opening a Qualified Retirement Plan (QRP) retroactively to 2021, with a corresponding deduction for 2021 contributions made in 2022.
For self-employed people (including Sub-S Corps, LLCs, etc.) with no W-2 employees except perhaps a spouse, an Individual 401(k) Plan offers the greatest flexibility in terms of administration and large contributions. Individual contributions are made through salary deferral, and the Company can contribute from annual profits. Plans can be opened until the Extended Tax Due Date, and Company contributions can be made retroactively for 2021. While some Plans allow Roth-style accounts, most Indy(k) Plans are used in part for tax deductions, and are therefore non-Roth style.
Small employers, if ineligible for the Indy(k) Plan, may open a Simplified Employee Pension Plan (SEP), also up to the Extended Tax Due Date. The SEP has less flexibility than the Indy(k), but works similarly, reducing taxable income and accumulating retirement funds for eligible employees.
Also available for small employers is the SIMPLE IRA, which has relatively easy rules, lower contribution limits, and comes with a few catches. First, it must be opened by September 30 of the year of the Plan is opened. It is not too late for 2022, but the SIMPLE Plan cannot be used to improve 2021 results. Other rules are straight-forward, and administration is (excuse me, please) simple. Once contributed, no funds can be withdrawn until a 2-year waiting period has been satisfied.
Tax years 2021 and 2022 allowed above-the-line deductions for some charitable contributions. Should Congress renew this deduction for 2022, this Blog will notify the readers in time to act on that valuable tax-saving provision.
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