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  • Writer's pictureSamantha Diggs

Retirement Plan Design for Tax Savings

Did you know that offering your employees qualified retirement plans can help employers, employees, and self-employed individuals benefit from tax savings? Designing and planning a retirement plan is important and contributing to a retirement plan can give beneficial tax savings. We will discuss how to increase your tax savings while building wealth for your future.

What is a Qualified Retirement Plan?

Qualified retirement plans allow employees to make pre-tax contributions to their retirement accounts while offering tax-deferred growth until the money is withdrawn. Employees are eligible to receive certain tax savings by deferring a portion of their taxable income. The employer can establish a retirement plan for the benefit of the company’s employees. In a competitive job market, an added benefit of providing a qualified retirement plan can help employers attract and retain good employees.

Three Features in Qualified Retirement Plans that Help with Tax Savings

  • Contributions

  • Deferring Tax on Earnings

  • Creates Tax-Free Income in Certain Circumstances

How Contributions can help with Tax Savings

Qualified retirement plans will give employers tax savings for contributions made on behalf of their employees.

  • Deductible contributions: is a payment to an individual retirement account that is tax-deductible to the employer.

  • Employment Taxes: An employer's contribution for Social Security and Medicare taxes under the Federal Insurance Contributions Act (FICA) is the responsibility of an employer’s federal payroll tax. For employer contributions, there are no Social Security and Medicare under the FICA taxes. This includes employer-matching and non-elective contributions to employees' 401(k) and SIMPLE IRA accounts. An employee’s salary reduction contributions are subject to FICA taxes for both the employer and employee.

  • Salary Reduction Contribution: Contributions made to a retirement savings plan that represents a percentage of an employee’s compensation. With some plans like 401(k), 403(b), or SIMPLE IRA, an employee is not currently taxed on salary deferral contributions.

How Deferred Tax Leads to Tax Savings.

Deferred taxes are taxes that are paid at the time of a distribution out of a retirement plan. This allows for a great amount to be invested within the retirement plan because funds are not diminished annually for taxes that could otherwise be paid through an individual investment account. Retirement plans require a minimum distribution at age of 72 based on the participants status in the plan at that age. The amount of the required distribution is determined using the IRS tables and are spread over the participants lifetime. At retirement, employees will most likely, but not guaranteed, be in a lower tax bracket and will no longer be subject to withdrawal penalties. Investing in a qualified retirement plan allows you to report less of your income as taxable wages.

Contributions to Designated Roth Accounts

A designated Roth account is a separate account that is created under a 401(k) or 403(b) plan. Designated Roth contributions are not excluded from the gross income and are currently being taxed. A Roth contribution is when money is electively contributed to this account from taxable income and is remitted to the retirement plan by the employer on behalf of the employee. Once qualified, distributions from the Roth account are withdrawn tax-free.

Qualified distribution of designated Roth contributions is excludable from gross income. Often made at least five years after the year of the participant's first designated Roth contribution and when the participant:

  • Attains age 59 ½

  • Becomes Disabled

  • Upon their Death

A designated Roth account under a qualified retirement plan, allows even higher-income earnings the ability to make designated Roth contributions allowing them to accumulate retirement savings on a tax-free income basis.

There are various benefits to offering qualified retirement savings to your employees. They include potential tax savings for employees and employers, employee recruitment and retention and finally building savings for retirement. Tax savings are important to employers, employees, and self-employed individuals, which means a qualified retirement plan for your employees can be a great benefit to offer. This process may seem confusing, but a team of experts at RPCSI can help guide you through the process of selecting and setting up a retirement plan for your employees. If you're ready to offer a qualified retirement plan for your employees and allow them to begin saving for their future, but also reap tax savings, give us a call today!

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