- If you’re self-employed or professional, there’s still time to lower your tax bill by opening an individual 401(k) plan and making a contribution for 2022.
- Secure 2.0 has enhanced these plans, allowing you to create one and fund one after the fiscal year ends.
If you’re self-employed or on contract, there are still ways to lower your 2022 tax bill, including contributing to a pension plan enhanced by legislation passed in December.
One of the provisions of Secure 2.0 included a change to individual 401(k) plans, designed for self-employed (and possibly spouses) or business owners without employees.
As with standard 401(k) plans, there is a pre-tax deduction for individual 401(k) contributions. But because individual 401(k) account owners can make deposits as employees and employers, there’s room for more savings.
Prior to 2022, you had to open an individual 401(k) by December 31 for current year deposits. But Secure 2.0 extended the deadline, allowing you to put a plan in place after the end of the fiscal year and before your deposit due date.
“It was a game-changer for us when we saw this come to fruition,” said Tommy Lucas, Certified Financial Planner and Enrolled Agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
Previously, when one-person businesses wanted to open a retirement plan after the calendar year, Lucas could have opted for Simplified Employee Retirement Plans, also known as SEP Individual Retirement Accounts, or SEP IRAs, another option for workers. independent.
However, since the recent legislative change, his company “almost always” chooses the individual 401(k) because customers may have the option of contributing more.
Individual 401(k) contribution limits
By 2022, you can contribute up to $20,500, or 100% of earnings, whichever is less, into a single 401(k) as an employee. (You can save an additional $6,500 if you’re 50 or older.) Plus, on the employer side, you can contribute up to 25% of earnings, for a plan maximum of $61,000.
In contrast, SEP IRA contributions cannot exceed 25% of employee compensation or up to $61,000 by 2022.
Previously, you could make employer contributions after the end of the tax year if the individual 401(k) form was already open. Secure retroactively approved 2.0 individual 401(k) account openings in 2023 while allowing employer contributions before the tax deadline.
For the 2024 tax season, you’ll also be able to take 2023 employee deferrals on your individual 401(k) after the tax year ends, according to John Loyd, CFP and owner of The Wealth Planner in Fort Worth, Texas. He is also a registered agent.
Of course, choosing the right retirement plan may depend on other factors, such as future employees or plan rules. “But it mostly depends on your net income,” he said.
This article was originally published in English by Kate Dore for our sister network CNBC.com. To learn more about CNBC, enter here.